Consider Balance Transfer Offers Carefully

Things to Watch Out For Before Transferring Credit Card Debt

Nov 19, 2009 Candice Gillingwater

Balance transfer offers are common, but individuals must be careful before transferring credit card debt to a new account lest they lose valuable introductory rates.

Credit card companies often offer seemingly great deals to attract new customers. Unfortunately, some of these deals are too good to be true and many come with a catch. Consumers interested in conducting a credit card balance transfer should be aware of the potential pitfalls and choose their new credit card company accordingly.

The Credit Card Balance Transfer Rate Isn’t Permanent

Low introductory rates on credit card balance transfers can be enticing. These introductory rates, however, are only temporary. After a given period of time, typically six months to one year, the low introductory interest rate will reset to a default rate--and the default rate is much higher.

During the introductory period, consumers must be cautious as well. A credit card that offers zero percent interest for six months on balance transfers does not mean that the zero percent interest applies to all purchases. Any payments an individual applies to the outstanding balance will be applied to purchases first. Credit card purchases can be charged a different interest rate than balance transfers.

The Spending Limit on the New Credit Card May Mean Trouble

Consumers who are considering transferring a debt from one card to another should verify that the spending limit on the new credit account is comparable to, or more than, their current card’s spending limit. A low limit could indirectly affect credit scores (See Learn How to Read a Credit Report).

According to a March 2009 report in The Wall Street Journal, approximately one-third of a consumer’s credit score is calculated by the amount he or she owes on various accounts. A portion of the credit scoring formula depends on debt-to-limit ratio to determine credit score. Transferring a big debt to a credit card with a lower spending limit will reduce the debt to limit ratio and injure a consumer’s credit score (See Calculate a Debt to Limit Ratio).

In more extreme cases, a customer may transfer their outstanding balance to a new card only to discover the balance is higher than the limit. The very act of transferring causes the account to accrue an over-limit fee which then results in the consumer losing his or her low introductory rate- and potentially having their credit card limit lowered even further (See Why Banks Lower Credit Card Limits).

Beware Balance Transfer Fees

Many credit card companies will charge customers a fee to be able to move their balances to another card. This fee can sometimes run as high as 5% of the balance itself. In some cases, the fee will cost the individual more than he or she can reasonably be expected to save by switching to a new card.

A list of just some of the credit card companies that currently charge a fee to transfer a balance are:

• Citibank
• Discover
• Bank of America
• Chase

Scott Bilker, the author of “Talk Your Way Out of Credit Card Debt” recommends that all individuals planning to transfer balances attempt to negotiate balance transfer fees with their credit card companies beforehand.

How to Prepare for a Painless Balance Transfer

Individuals hoping to enter into a new credit card agreement via a balance transfer, should tread carefully and follow some basic guidelines.

1. Read the fine print. That new credit card agreement may not be much better than the original. Read it to find out for sure.
2. Call and ask any questions ahead of time. It’s much better to find out now rather than after the new credit card contract is signed.
3. Make a plan to use the low introductory rate to pay off debts rather than accrue new ones cheaply.
4. Attempt to negotiate balance transfer fees. This may take repeated telephone calls to the credit card company and talking to numerous managers and supervisors but keep at it. Persistence has its rewards.

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Watch Out for Balance Transfer Fees