Understanding the Fine Print on Credit Card Balance Transfer Offers

People incur credit card debt for a number of reasons ranging from medical expenses, unemployment, and poor money management. According to figures provided by Cardweb.com, the average American household with at least one credit card has approximately $9,200 in credit card debt. These figures seem to increase every year. If you only make minimum payments on this balance each month at the average interest rate (which is currently near 16%), it would take you more than 30 years to pay off this debt and with interest, you would end up paying almost twice the amount that you originally owed. Many people are now turning to balance transfer offers (which typically offer significantly lower interest rates) as a means to consolidate and make a dent in their credit card debt. Taking advantage of balance transfer offers can be an excellent way to pay down debt if you take the time to really read and understand the fine print.

Some balance transfer offers may come from credit card companies that you currently have a relationship with. Others may be offers to open "new" cards and include special introductory rates. Before completing a balance transfer offer, you should always consider the following questions:

How long does the balance transfer rate last?

Many credit card companies offer introductory or promotional 0% balance transfer rates that last for six months to one year. You will want to check and find out what the card's annual percentage rate is after this rate expires. Typically, after the promotional period, the rate jumps to the current rate on the card. If you have the ability to pay off the card during the promotional period, then this is probably a great option for you, but if you don't think that you will be able to pay off the card during this time, you will likely find yourself in the same situation you were before (with high minimum payments and high interest rates).

Some credit card companies offer "fixed until your balance is paid in full" promotions that may range from 2.99% to 7.99%. These may be a better choice if you suspect that you will not be able to pay down your balance before the promotional period ends.

Are there balance transfer fees or additional requirements to be aware of?

Read the fine print closely to find out if there is a balance transfer fee. Some credit card companies will waive the balance transfer fees for "new" customers. Balance transfer fees are typically 3% of the balance that is being transferred. Some cards will "cap" the fee at $50 to $75, but others will not. If this is not clearly spelled out in the paperwork that you received, you may want to call the company to ask for the specific information. To put things in perspective, on the $9200 balance referenced above, you would pay $276 if the fee was 3%. You need to consider the credit limit on the card you are transferring the balance to because a transfer fee could take you over the limit resulting in additional fees. In addition, if the rate is a promotional rate that will expire, the additional fee for the balance transfer may not be worth it.

Some cards have additional requirements in addition to or in place of balance transfer fees. For example, a few years ago, I completed a balance transfer with Discover. Based on the terms of the offer, I would have a 0% interest rate for the life of the balance as long as I made at least two purchases a month using the card (and there was no "minimum" amount for the purchase). Also, I recently saw an offer from Citibank that specified a promotional rate as long as the customer made a $150 purchase within the first month of the balance transfer.

What happens if you make a late payment or go over your limit?

Most credit card offers will specify that if you "default" on your agreement with them, your promotional rate will end and the annual percentage rate will increase to the "default rate" as outlined in your card agreement. In some cases, the default rate can be as much as 29.9%. If you make a late payment or exceed your credit limit, this is considered a default on the card agreement. You should also be aware that the company many monitor your credit report and if you default on another card with the same creditor (or in some cases with any creditor), your rates may also increase.

How are your payments applied?

Many credit card companies will allocate payments to balances with lower annual percentage rates before applying payments to balances with higher annual percentage rates. This means that balances with lower annual percentage rates will be paid before balances with higher annual percentage rates. If you already have a balance on a credit card that you are looking at using for a balance transfer, this may not be the best option for you. Also, if you are going to complete a balance transfer to a card, it is not wise to continue to use the card to make additional purchases.

A few final considerations

If you are considering opening a new credit card account to take advantage of a promotional balance transfer rate, make sure that you check out the reputation of the company first. Cardratings.com is a good place to start and has over 20,000 credit card reviews and ratings.

When you apply for a new credit card, it will be reflected on your credit report. Too many inquiries in a short amount of time could hurt your credit score. Also, if you are transferring a number of balances to one card to consolidate balances, the high utilization on one card could impact your credit score. In addition, most companies will not allow you to use a balance transfer offer to pay off other credit cards that their company owns.

If you are not sure what credit limit you would qualify for on a new card or are hesitant to open a new card, you could try calling your current credit card companies to see if they will match the promotional rates you have been offered. Some cards would rather keep your business, even if it means doing so at a lower interest rate. If you able to successfully negotiate this, you will also be able to avoid paying balance transfer fees.

Completing the transaction

There are typically three different ways in which you can complete the balance transfer transaction: over the phone, online, or by using a balance transfer check. When you keep complete a balance transfer, make sure that you keep all of the paperwork regarding the terms and conditions of the offer. If it is an offer that expires, keep track of the end date.

Even though you have submitted the balance transfer request, continue paying minimum payments on other accounts until the transfer has been completed. It sometimes takes seven to ten business days to complete these requests. If you miss a payment during this transition time, you could have to pay late fees on the other cards, and you may default on the terms of your promotional request.

Discipline yourself so that you do not incur any additional debt. Put steps in place to create an emergency fund. Work diligently to pay down your current balance and consider an accelerated method to do so. Bankrate.com offers some excellent financial calculators that will help you calculate the "true" cost of your debt and that will also help you create a plan for being debt free in a specified amount of time.