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Balance transfers have been popular among credit cardholders for a number of years. More consumers are now considering a balance transfer due to the rising interest rates on their existing cards. But is this a good idea?
If you have good credit and your credit card APR is currently above 20%, this is the time to consider transferring your balance to a card with a lower rate. As we saw in 2009, balance transfer fees are increasing and the introductory periods on these offers are decreasing. This trend is likely to continue in 2010.
“Balance transfers are a good illustration of the changes in the credit card industry. Issuers once used balance transfer offers to lure cardholders from other issuers; they were eager to accept any application because any growth was good. The loans were cheap and easy with 0% for at least twelve months and no balance transfer fee. These loans were so easy to get that some cardholders transferred their balance from card to card at the end of each introductory period, never paying interest on their credit card debt,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Several years ago, issuers added a 3% balance transfer fee, with a $50 or $75 cap. Then the cap was dropped. 3% was the standard fee until some issuers began raising it last year in an attempt to increase revenues in any way they could.”
Here are the current balance transfer fees by issuer:
- Chase: 5%
- Discover: 5%
- Bank of America: 4%
- Citi: 3%
- American Express: 3%
- Capital One: most do not have balance transfer fee, but the Platinum Prestige card charges 3%
“The CARD Act does not restrict balance transfer fees. It would not be surprising to see further increases in the balance transfer fees this year,” says Hardekopf.
Issuers learned a lesson from the lending meltdown that helped bring the record-setting defaults that are still dragging down credit card revenue. Today, credit card default rates exceed 10% for some issuers. This makes issuers even more sensitive to risk and they are taking strong measures to avoid it. They have sliced credit limits and limited the terms of balance transfer offers to reduce risk. In the eyes of the issuer, cardholders who need a balance transfer the most are likely in a higher risk category and could have a greater probability of default.
Who Should Apply for A Balance Transfer Card?
Start with your credit score because issuers will use this to determine your credit limit, interest rate, and length of the introductory period. If you have excellent credit (a FICO score of 740) and your APR is over 15%, you should consider transferring your balance to a card with a lower interest rate.
If your credit card rates are high because your credit score is low, it is unlikely that you will receive the offer that you need, so you must have realistic expectations. You will not receive the lowest advertised rate and your introductory period may only be three to six months. Your credit limit may be less than the amount that you requested and you may not be able to transfer your total balance. Use the average limit of your other cards to estimate the credit limit for a new card. Balance transfers may be limited to a portion of your credit limit.
“Before a consumer transfers a balance from one card to another, one should do the math to see if the amount of interest payments that you save via the introductory offer outweighs the balance transfer fee that has to be paid immediately. Be sure to factor in the ongoing APR if you are not able to pay off the entire balance during the introductory period,” says Hardekopf.
If the offer you receive does not meet your needs, decline the card. Limit the number of applications because multiple credit applications are a red flag on your credit report and can lower your credit score.
Which Card Should You Apply For?
The length of time it will take to pay down your debt should determine the cards you compare for balance transfers. If it will take you more than a year to pay off your balance, look for a card with a low ongoing low interest rate because a low APR for the long-term is likely to be more important than the length of the introductory period.
If you can pay off your balance in less than a year, apply for a card with 0% for 12 months for balance transfers. With a 0% loan, you will pay off your balance much faster if your total payment is applied to the balance. You will also save yourself money in interest payments
The best cards for balance transfers are the ones that offer an introductory period of twelve months for balance transfers and a low ongoing APR. Pay attention to what transactions are included in the introductory offer. Some offer 0% for 12 months on purchases, but not balance transfers; similarly, other cards may not include the 0% on any purchases.
Avoid cards with high interest rates, even if they offer generous rewards. Since you carry a balance, paying off your debt as fast as you can at the lowest interest rate is the only factor you should use to compare credit cards. Most credit card issuers do not give you points for balance transfers.
The Fine Print
- You must pay on time, every time. If you have a late payment, your introductory period will likely end and you will be assessed the APR on the transferred balance.
- There is no grace period with balance transfers. Interest charges begin at the time the check is issued to your credit card institution.
- You can’t transfer your balance to another card with the same issuer.
- It takes about four weeks for the balance to be transferred. Continue to make all required payments until you confirm that the balance transfers were made. Multiple balance transfers will process in the order they are requested on the application.
- The new issuer pays the amount of the balance directly to the old issuer and the amount you owe them will be reduced by the amount you transferred. The available credit on your new account will be reduced, as if you had made a purchase.
- Transferring a balance does not automatically close your old account. If you want to close the account, contact the issuer directly.
- Issuers have the right to decline balance transfer requests or transfer less than you requested.
“After you transfer a balance, stop using the old card. If you use both cards for spending, you could soon have large balances on both cards and get yourself deeper in debt that you were before,” says Hardekopf.