At first glance, it looks like a life saver for a credit card customer with a burdensome balance: a chance to move the debt to another card that charges little to no interest. But balance-transfer fees went up the past year, and other pitfalls await the unwary.
In promoting balance transfers, card companies tend to emphasize the no-interest or low-interest charged on transferred debt, typically for six months to a year. But there often is a separate “balance-transfer fee,” and a recent study by Pew Charitable Trusts found that banks had recently raised this fee to an average of 4%, from 3% in July of 2009. Some card issuers charge 5%, though credit unions kept the fee steady at 2.5% on average.
Banks have raised a variety of fees in the wake of the Credit Card Accountability, Responsibility and Disclosure Act passed in 2009. Some of the act’s provisions kicked in Aug. 22, and others had started earlier.
A balance transfer can make sense if the alternative is continuing to pay 15%, 18% or more with the old card. But it’s important to look at the big picture, and to shop around rather than just jump at the first unsolicited offer that arrives in the mail.
In addition to researching the transfer fee, check how long the zero- or low-rate deal will last. Obviously, 12 months is better than six.
Also, find out how high the rate will be after the initial period. If it will be higher than your old card’s, then the transfer may not make sense unless you are sure you can pay your debt off, or at least reduce it substantially, before the rate jumps.
As a rule of thumb, a balance-transfer should be seen as an opportunity to clear debt faster, not a way to reduce interest charges over the long term. The less you have to pay in interest, the more you can pay on the debt itself.
Note that if you make the minimum monthly payment, the card issuer can allocate it to the low-rate transfer balance first, while new transactions on the card will accrue interest at the regular rate. Anything you pay above the minimum will go to the debt with the highest rate, but that means your low-rate transfer may not be paid off before the rate jumps.
Since this can be confusing and hard to track, try not to incur new charges on the card until the transfer is paid off. To retire the debt before the rate jumps you’ll have to pay substantially more than the minimum required. The Accelerated Debt Payoff and Credit Card Minimum Payment calculators can help you devise a smart strategy.
Also, use the search tool to find cards with good balance-transfer deals. Clicking on the “Apply Here” button will take you to a page with details on the offer, including balance-transfer fees.
It could also pay to talk to the card issuer on the phone, to see of you can get a deal better than the one advertised.
Keep in mind that opening up new credit card accounts can damage your credit rating even if you have a good payment history. That’s because the more credit you have available, the greater the opportunity to pile up too much debt. While transferring a balance to a card with a lower rate can save you money, doing it too often makes it look like you’re having trouble paying off your debts, a red flag that could hurt your chances of getting loans in the future.