Credit Card Balance Transfer Traps
Before You Accept a Balance Transfer Offer, Read This
Low-rate credit card balance transfer offers are plentiful these days. How do you choose which one is right for you?
If you carry a balance on your credit card and you get an offer for a 0% interest rate to transfer it, is there any reason not to just jump at it? In a word, yes.
There is No Such Thing as a Free Lunch
Most low or no balance transfer offers come with some sort of catch. Here are the most common ones:
1. A Short Introductory Period, After Which the Interest Rate Goes Up
In some cases the rate may go way up. Read the fine print to figure out what the interest rate will adjust to after the introductory 0% rate period is over. Then ask yourself if you will be able to pay off the balance before then.
It still may be worth it to you to transfer the balance, then shop for another low-rate card after the introductory period is over. Just know what you're getting into before you make the switch.
2. A High Balance Transfer Fee
Some balance transfer offers come with high fees attached -- some as high as 3% of the balance plus a flat fee of $50 or $75. If your credit card balance is 5,000, that's $200 to $225 right off the bat.
If the introductory interest rate is only good for a few months, it may end up costing you more money to transfer the balance than if you stuck with the card you're carrying now.
3. A High Rate for Purchases
One of the common tricks banks use to make money from low credit card balance transfer offers is to offer a higher rate on purchases. So you get a 0% interest rate on the balance transfer, but your rate on purchases is 19% or more.
Not only that, but when you make a payment, it goes toward the 0% portion of your credit card balance first, not the higher-rate portion for purchases. So say you transferred a balance of $5,000, then made a purchase for $20. You'd be paying 19% on that $20 item until the $5,000 balance is completely paid off. Not such a good deal, is it?
What to Look For in Balance Transfer Offers
The best balance transfer deals have:
- No balance transfer fees at all
- The teaser rate for the life of the balance (or at least 12 months; the longer the better)
- A relatively low interest rate for purchases
- No annual fee
To figure out whether or not a balance transfer is right for you, check out these debt relief tools and calculators. To find out whether you need debt help from a professional organization, read this article about consumer debt management plans.
