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Balance Transfer Credit Cards
Ideally you shouldn't have balance on your credit card, but life is far from being ideal. Sometime we go over our head on spending and accumulate balances on credit cards. Most credit car companies charge double digit interest rates, so longer you keep the balance, more you pay in interest and finance charges. However, if you carry balances, that's not end of the road. Credit card business is highly competitive and credit card companies offer outrageous incentives to new customers. One of the most common method of dealing with high interest balances is to transfer them to a new credit card. This article help you understand the process and explain the fine prints that most people don't read.
If you're ready to transfer high interest balances, you should ask yourself some critical questions.
1. How long you need to pay these balances off?
2. How long does the introductory rate last?
3. Is there a balance transfer fee? If yes, how much.
4. What is the card's annual percentage rate after that teaser rate expires?
5. Does the introductory rate apply to transferred balances or new purchases or both?
6. Does that card have an annual fee?
7. find out about late fees and over-the-limit fees?
Most people focus too much on questions 2 thru 7 and very few consider question 1. This is exactly what most credit card companies want you to do. What they are counting on is the high interest they hope to charge you once your introductory rate expires. So make sure you have a plan in place if you're not going to be able to pay if off during introductory rate period.
Once you've decided to transfer balances, run some number to figure out savings. First thing you want to do it to find out the current interest rate on your existing card. Here is a simple example to make it easy to understand.
Let's say you have a credit card with $10,000 in balances and 15% interest rate.
Annual Interest payment = $10,000 X .15 = $1,500
your exact interest payment is going to be slightly less if you're making minimum payments. But any saving in interest payment could easily be wiped out by late fees if you miss one payment a year.
Now let's assume that you've decided to transfer these balances to a new credit card with 0% introductory offer for 12 months with 3% balance transfer fee.
Total interest paid during 12 months on new card = $10,000 X 0 = $0
Amount paid for balance transfer = $10,000 X .03 = $300
Total finance charge for 12 months = $300
Saving by transferring balance = $1,500 - $300 = $1200
As you can see, there is some good saving even if you paid balance transfer fee. Some credit card might even waived this fee or limit it to $90 for new customers. that could easily add another $200 to $300 in your savings.
But here is the catch. You must not default under your card holder agreement or your introductory rate will expire immediately and you'll pay regular interest charges. This is the most critical piece of information on any balance transfer process. Now you should ask yourself a simple question. Can you make minimum payments for a year without a default?
If your answer is a "firm" yes, then you should go ahead and do it. If you think "may be", then you should compare the highest interest rate on two cards and your original credit card may come out on top.
Here are some more tips before you accept the balance transfer offer.
Instead on accepting online, pick up the pone and call the toll free number. Sometimes you already have an amount in mind that you would like to transfer and online process may cause problem with that limit. For example, if you're thinking about a $5,000 balance transfer and apply online, automated process may only allow you a credit limit of $2,000. So you ends up with another credit card without accomplishing what you intended to. However, if you pick up the phone, you can confirm the credit limit up front before committing to the offer. If they don't offer you what you want, you can declined and move on.
Read the offer closely and a few times. A lot of the information is hard to understand. For example, some offers waives fees for "initial balance transfers" only. These are the transfers that are authorized when the customer accepts the card and completes the balance transfer form. In such cases, every other balance transfer is treated as a cash advance and is subject to cash advance fees.
Compare multiple cards. If you're unable to pay it off by the time introductory offer ends, you should pick a card with low regular APR. For example, a 3.9% APR for the life of the balance is far better than the one with 0% introductory APR for 12 months and 18% thereafter. Once comfortable with the terms of the offer, be sure to fill out the balance transfer form carefully. Incomplete information may halt or delay a transfer.
Continue to pay minimum payment on old card until balance transfer is complete -- which may take anywhere from two to four weeks. Most people think that old card doesn't matter anymore since they are transferring balances and stop paying. This can cause late fees and extra finance charges. The last thing a person who is trying to minimize their credit card costs needs is a $35 late fee and a penalty rate.
Once you've zero balance on the old credit card. Don't put new charges on it. Also, don't close it right away. It will hurt your credit score. Keep it as a insurance in case they offer a better transfer rate down the road and you still have balances on another card that you could transfer. |
