Credit Card Trivia – Balance Transfers

If your mailbox is anything like mine, you get several balance transfer offers from credit card companies every week. They're non-stop. It's enough to make you wonder if the shredding machine industry is in bed with the credit card industry. I regularly receive offers ranging from 0% to 5.99%, with offer times ranging from three months to "until it's paid off." Sometimes these offers are worth a switch - most of the time, not so much.

First of all, be cautious about accepting a balance transfer offer that involves opening a new account. Your goal should be to get rid of debt, not to open yourself up to more. If you are having trouble disciplining your spending, freeing up a credit line by moving it all to a new card is just asking for trouble. Also, opening up lots of new accounts can negatively impact your credit score.

Next, read the fine print. On almost every balance transfer offer, there is a fee. Down on the bottom of the offer or on the second page, in little teeny tiny letters, there will be something that mentions a fee of probably around 3% of the amount transferred, with a minimum of $5 and may have a maximum of $25-75 for each transfer. More and more often, there is no maximum – there will be a flat fee for the entire amount transferred . If you move several small balances over, you're going to pay several transfer fees. Those amounts increase your ultimate payoff figure, of course.

Now read some more fine print. Actually, I'm not sure that this shows up in the actual transfer offers, but if you're doing a transfer to an existing card, you can bet that this next bit is in your account agreement somewhere, and it's a doozie: Lower interest balances will be paid off first. Let's say you have a credit card with a $2000 balance @ 18.9%, and you transfer $2000 over at 2.9%. If you send in your minimum payment (4% of the balance, for the purposes of this example - $160), here's how it breaks down - and I'm being approximate here:

$2000 @ 18.9% annually = one month finance charge of $31.00
$2000 @ 2.9% annually = one month finance charge of $4.77

So, out of your $160 payment, there will be $124.23 left to put towards your balance. It will get put towards the 2.9% balance. That means the next month your finance charges look like this:

$2000 @ 18.9% annually = one month finance charge of $31.00
$1875.77 @ 2.9% annually = one month finance charge of $4.47

You just saved a whopping $.30 in finance charges for the month. Not until you work through that 2.9% balance will you even begin to start knocking down the 18.9% balance. And by then, the credit card company is going to try to get you to take on another new transfer. Just keep in mind that whatever rate you're getting on the transfer needs to be weighted with your existing debt.

Also, keep in mind the time frame. If you only have six months to pay off a balance before the rate jumps to something ludicrous like 24%, maybe it's not worth transferring. If you know you can pay it off within that time and the transfer fees aren't outrageous, go for it. Sometimes you'll even get transfer offers that are good until the balance is paid off - I like those.

Finally - don't be late. As I covered in another post about credit cards, you are all kinds of screwed if you're late on a payment. Any great transfer rates are null and void after late payments, and you'll probably see other companies raise your rates as well.

Balance transfers can help you get your debt under control - just be sure you are actually the one in control, not the credit card companies.

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