Balance transfer credit cardsSo what excuses might we give for failing to take advantage of such offers? Because millions of us do. According to this site's credit card rates monitor, the average interest charged by rewards credit cards is, at the time of writing, 17.45 percent APR. At the same time, at least four balance transfer credit cards (three from Citi; one from Discover) are offering zero percent APRs for a full 18 months. Using a "How much will I pay in interest?" credit card calculator to do the math, someone paying that 17.45 percent average rate with a $5,000 balance would save -- tax-free, of course -- $945.77 in the first 12 months alone. Chances are, you wouldn't poke your boss in the eye with a sharp stick if he or she offered you that as an extra bonus. You can find current balance transfer offers with one click. When you do, be sure to check out the Citi® Simplicity® Visa, and Slate® from Chase cards, both of which, at the time of writing, have excellent offers.
Credit card switching: why so rare?Of course, not everyone can qualify for balance transfer offers: you need a pretty good credit score to stand a chance. But that question about why we don't switch our plastic more often is a good one. Are we really so loyal to our credit card companies that we're prepared to pay them more than than we would if we opted for one of their competitors?
It's more than a decade since David M. Frank of Iona College published his paper, To Switch or Not to Switch: An Examination of Consumer Behavior in the Credit Card Industry. But it's easy to suspect that some of his findings still hold good. He suggested that consumers fail to switch cards, even though they know they could save money, because:
- They've grown skeptical about teaser promotions and "gotcha" terms and conditions, and have concluded there won't be much long-term benefit in chasing lower credit card rates.
- They ignore direct marketing invitations from card issuers. There are so many offers for plastic around that these have become invisible as they've merged into the general promotional background.
- Some know so little about how credit cards work and even their own spending habits that they've lost interest in keeping their borrowing costs to a minimum.
Making the wrong choices That skepticism about the long-term benefits of chasing low rates may be well-founded. In 2005, Haiyan Shui and Lawrence M. Ausubel of the University of Maryland conducted another study, Time Inconsistency in the Credit Card Market. This found that many consumers are terrible at choosing good credit card offers. In the study's survey, all but the most financially literate were likely to pick the poorer of these two deals:
- A 4.9 percent APR introductory rate for six months
- A 7.9 percent APR introductory rate for a year
Switch credit cards and switch againThe Shui/Ausubel study came up with another interesting conclusion: few who switch to zero-percent balance transfer deals are likely to switch again at the end of the promotional introductory period, even when their balances remain high and the rates they're paying have reverted to ones as high or higher than previously. With masterly understatement, the authors observe: "This is puzzling because there are many other offers available and the benefit of switching is as large as before."
The fact is, many of us act irrationally when we manage our credit card finances. Nowadays, with online credit card calculators freely available, there's no good reason for that: it's takes a matter of moments to model different offers and see in cash terms the implications of each.Why do so many of us fail to do that? Who knows? Maybe, like the Brits, we simply can't be bothered.