Consumers are quickly losing low-rate options for refinancing loans like credit card debt. The credit crisis has almost eliminated home equity loans with cheaper interest rates, and recent philosophical changes in the credit card industry have reduced the offers for transferring debt to cards with lower rates.
Until recently, credit card balance transfers were a part of aggressive competition by credit card companies to attract consumers with credit card balances from other issuers. However, Chase recently announced that it is lowering its emphasis on balance transfers and teaser rates.
0% for 12 months offers may become a passing fad as credit card issuers focus on more effective ways to increase cardholder usage with the cardholders they have. If you have considered transferring your balance to a card with a 0% intro rate for 12 months, now is the time to act because these offers are shrinking or becoming harder to get. Consumers should compare offers from several different credit cards to secure the best deal.
Transferring your credit card balance from a high rate credit card to a lower rate card can lead to significant savings. For example, paying the minimum required (which averages 2.5% of the balance) on a $5,000 balance with a 14% APR will take 20 years to pay off and will cost $4,167 in interest. Transferring that same balance to a card like the Blue from American Express with a 4.99% fixed rate for the life of that balance will make a huge difference. Assuming you pay the minimum payment, it will take 13.67 years to pay off and cost $958 in interest. That is a difference of 6 years of payments and $3209 from the higher rate credit card. The best advice is to pay more than the minimum payment and get the debt taken care of as soon as possible, but for consumers who can not do that then the balance transfer provides a great option.
Here are seven tips for credit card balance transfers:
Know how much you can pay towards your balance each month and how long it will take to pay it off; then find the card that fits your time frame for paying off your balance. The 0% intro rate for most cards is 6-12 months. These are a good choice if you can pay off your balance during this period with the lowest rate. However, be aware that the rate after this introductory period may be higher than average. If it will take over a year to pay off your balance, look for a card that may offer a slightly higher rate for balance transfers, but the rate is fixed for the life your balance. For example, Blue from American Express offers 4.99% fixed rate for the life of the balance transfer submitted with the application.
The low rate is only for the amount you transferred. Unless the offer includes purchases, any purchase made with the new card will be at the much higher rate. In an unfair but clever trick by issuers, your monthly payments will be used first to pay off the balance that you transferred with the lowest rate. New purchases with the higher rate will accrue finance charges until the low-interest balances are paid off. Knowing how your payment is processed is a good way to control your credit card use. If it takes 12 months to pay off the transferred balance, then you are going to pay a much higher interest rate on any new purchases made with the card. If you think you are going to also make purchases with the card, look for one that also offers 0% on purchases for 12 months. You don't want to be caught by this and pay 14% interest on a $40 meal or a tank of gas.
If you have a low credit score, you may not get the advertised intro rate. Read the terms and conditions before applying for the card. For example, Chase Platinum Visa reduces the intro rate period from 12 to 3 months for those who fall into its standard rate tier. If the offer you receive will not help your situation, cancel your application; do not keep the card. Improve your credit score, and try again in a year. If you have a good payment history with your current card, contact them to ask for a lower rate.
Know the fees before you transfer your balance. Fees are now at least 3% of the amount of the balance transferred and some cards do not put a cap on these fees. Always factor in the fee when comparing intro rates, because a high fee can taint the offer. For example, if you transfer a balance of $5,000 from a card with 18% to lower rate of 14%, you will save $200 the first year, but the fee for the balance transfer fee could cost you $150. The fees are charged per balance transfer; if you transfer balances from two cards, you will pay two fees. Also, avoid cards with an annual fee. There are plenty of good offers that don't charge an annual fee.
The amount that you can transfer to a new card will be determined by your approved credit limit. If your request exceeds the available credit line or the amount approved, the transfer request will be honored up to the amount approved and you will be notified. If the new issuer does not accept the whole balance, you will be stuck with the remainder on your old card. Remember that balance transfer fees will be added to your balance; if you are at your credit limit, these could send you over your limit and add over-the-limit fees. It is a good idea to keep your balance at less than half of your credit limit.
Pay on time because the intro offers are good only while you are making your payments on time. If you miss one payment, your rate will jump to the full rate. If you miss two payments, it may jump to the default rate of 25-32%. To help yourself, set up automatic bill payment. Most cards also provide payment alerts to remind you when your payment is due.
Know the process. It takes up to six weeks to complete a balance transfer. Continue to pay the minimum payment on the old card until the transfer is complete. You will receive a notice of the balance transfer from the new issuer. You will receive a billing statement with a zero balance from your old credit card company. Keep this in your records. Call or write the issuer of the old account and ask them to note in any statement to the credit bureaus that the account was closed at the customer's request. Watch for payments to show up as credits on your other credit card statements. If the credited amount brings the balance down to zero, you may then cancel those accounts. It is up to you to call and cancel the account; transferring a balance doesn't automatically close your account.
Bill Hardekopf is the CEO of LowCards.com (www.lowcards.com), a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards/rebates, and lowest intro rates. It also gives an unbiased ranking and review for each card, making it easy for consumers to compare more than 150 credit card offers and apply securely online. It also provides advice about credit card and debt issues, news, and credit card updates. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for over seven years.
Take the Next Step:
See if you qualify for lower payments or interest rates on your credit cards. One call to our friends at Cambridge Credit Counseling could help put your budget back in balance. (sponsored link)
If you are considering a credit card balance transfer, you should compare offers from several different credit cards to secure the best deal. Lowcards.com can help with the comparison.
Sign up for our free eNewsletter Dollar Stretcher Tips.
Looking for an answer to a frugal living question? Click here to ask a Dollar Stretcher Stretchpert!
Copyright 1996 - 2013 "The Dollar Stretcher, Inc." All rights reserved unless specifically noted.
Contact the Dollar Stretcher at:
PO Box 14160
Bradenton FL 34280
"The Dollar Stretcher, Inc." does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for their own situation.