Pros and Cons of Credit Card Balance Transfers
Low Interest Teaser Rates can Backfire on the Borrower
Nov 9, 2009
In addition to charging purchases and cash advances, credit card companies may offer cardholders the option to transfer a balance from another credit card, or sometimes offer customers the option to use a check as a cash advance.
These options are often offered at a reduced interest rate, also known as a teaser rate. The teaser rate can be for an unlimited time, but is more likely of limited duration. For instance, a transfer option might be at a 5% rate six months, and if not paid off at the end of that period will revert to the normal interest rate on the account.
The company may charge transaction fees on the transfer. These are generally charged as a percentage of the amount, and may have limits (e.g. 5% up to $300) but some fees are not capped, and percentage applies to the entire amount of the transfer.
Positives of a Low-Rate Balance Transfer
Customers can use a balance transfer to pay off higher interest loan, particularly higher rate credit cards. If there are no restrictions on use, the cardholder can use the money as a loan for any purpose: paying off credit cards, investments or any large purchase where a credit card cannot be used.
Even in transactions where credit cards can be used, if may be advantageous to use the convenience check to get the lower interest rate, taking into account any transaction fees associated with the check.
Taking the teaser rate may be a good short-term strategy for consumers that have gotten behind on one credit card, but have a plan to get out of it by the end of the teaser rate.
Negatives of a Low-Rate Balance Transfer
Many consumers who have gotten behind on credit cards do not have a plan to get out, and a lower rate balance transfer may result in greater difficulty. Once an account is paid off with a balance transfer, temptation to use the card may result in unpaid balances on two cards or more cards.
Other negatives to balance transfers and credit card checks:
- Transaction fees on balance transfers may result in higher interest rates than expected because the fee is charged to the card immediately, as in this example.
- The use of balance transfers may lower a cardholder’s credit score.
- If the cardholder is late with payments, or there is an overlimit condition, the rate may revert to the cash advance rate. Be sure to review the fine print of the offer.
- Credit card balances reduce the amount of available credit, which may lower the credit score, possibly resulting in rejection of a loan application, or approval only at a higher interest rate.
- Borrowing to make an investment may be unwise. If the investment doesn’t produce the expected returns, there may not be sufficient funds to pay off the credit card balance during the term of the teaser rate.
Taking a balance transfer is a risky strategy, but may be helpful for a short period if all the consequences are considered.
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