One way to reduce the amount you pay in credit card interest is to do a balance transfer switching your high interest credit card rate for a much lower rate, often times 0% for a certain number of months. The problem is that it’s often difficult to tell what all the fine print means when doing the balance transfer which may ultimately come back to haunt you if you aren’t careful.
Forum member neatdesign (Jenney) put together an excellent check-list of all the things you need to look for in the fine print of those credit card balance transfer offers to make sure you’re getting what you want:
I used to work for a credit card company, and about the only positive thing I got out of that experience is learning how to read credit card offers and know what to look for. Here’s what I look for, in no particular order:
How long does the intro APR last? — If the offer says, “0% until August 2008” then that’s a bit vague to me. Do they mean until August 1, 2008 or August 31, 2008? Or do they mean until your August 2008 billing period, which could be before, during or after August 2008. If I apply for it, I assume the intro APR will end one month BEFORE whatever it says on the offer. That way if my plan is to pay it off in full by the time the intro rate expires, then I know I’m safe.
What’s the post-intro APR? — Some people get so excited about the intro rate that they forget it won’t last forever. Check to see what the post-intro rate is and determine if that’s something you can live with if you can’t transfer the balance right away after the intro period ends.
What are the default rates, and when/why would they kick in? — What’s the worse that could happen if something goes wrong?
Make 3 purchases/month to extend your 0% BT rate — You’ve probably seen or heard of the offers I’m talking about: They allow you to extend the BT intro rate for the life of the BT balance as long as you make a few purchases (typically 3) each billing period to your account. (I have one of those accounts right now, actually.) I believe some people are wary of these offers but if done right they can really work to your benefit.
If you get an offer like this, you’ll want to look for three things:
1) What is the purchase APR? If you plan on making purchases on an account, you need to know this.
2) What is the minimum monthly finance charge? This should not be overlooked, because most credit cards have a 50¢ or $1.00 minimum finance charge if there’s a balance carried month-to-month. Those small amounts add up, so you need to take them into account.
3) Does the offer specify HOW MUCH the purchases have to be? If the offer doesn’t specifically say “Each of your qualifying purchases must be at least $X minimum,” then they can cost ANYTHING. You can buy postage stamps — or even something less expensive for only a few cents — and that would suffice. Just as long as you make the required number of purchases AND they post DURING your billing cycle, you’ll keep your intro BT rate.
Minimum payment percentages — Most BT offers DO NOT disclose what the minimum payment percentages are. Don’t assume that because BofA only has a 2% minimum payment that this offer will. Depending on the offer, it can range anywhere from 1% to 5% typically. If this is a concern, call the credit card company BEFORE you apply and ask what the minimum payment percentage would be.
Universal default — I try like hell to stay away from companies that have “universal default”; that is, if you are reported late on company XYZ’s credit card, company ABC will jack up your rates — even if it’s a totally separate company! The thing about universal default is that a lot of people think, “Well, I always pay on time so that really doesn’t apply to me” — only mistakes DO and CAN happen. And while the company who made the mistake might be willing to waive the fee and correct the error, that doesn’t mean your other creditor who uses universal default will be as forgiving. An offer’s fine print might not CALL it “universal default” but if the company practices it, the offer will have some kind of disclosure which describes basically the same thing. Watch out for it!!
Internal BTs not allowed — This is pretty standard now in the industry. Credit card companies want to take business away from each other, not shuffle balances between internal accounts. However, they don’t ALWAYS prohibit it. The fine print will say whether they do or not.
BTs only permitted between accounts listing you as an account holder — This is a big one for me, because practically the only reason we open new credit cards is for a low APR BT, but we have a couple of accounts that aren’t joint. I always scour the fine print to look for this disclosure: “You may only make balance transfers to accounts that list you as an account holder.” Obviously if you are a single person, or even a married person who keeps separate finances, this probably isn’t an issue for you. But in our case, depending on the account I want to transfer, that one little disclosure could make or break it for us.
BT fees — This one probably goes without saying, because of course no one wants to pay a BT fee. In any case, here’s what I do: First, see if there is a BT fee (duh.) Second — and this is very important — see if there is a maximum cap to the BT fee. Historically BT fees were something like 3% of each balance transfer, with a minimum of $5 and a maximum of $50 or $75. However, there are several companies now that have a 3% BT fee with a $5-$10 minimum and NO maximum cap. Which means if you’re transferring over $3500, your BT fee would be $105. If that’s the case, then you need to ask yourself whether the $105 fee would be more, about equal to, or more than what you’d pay in interest on your current account over the length of the intro rate period (6 mos, etc). If it’s less, then go for it. If it’s not, then you might want to hold off until you get a better offer.
Payment allocation — You mentioned getting cash back. Most rewards aren’t extended to BTs — I rarely, if ever, see that. If you mean getting cash back on purchases, I strongly encourage you NOT to use a credit card for purchases that you’ve transferred a balance to. Because payments are usually allocated to pay down the balance with the lowest APR first, it will take FOREVER to pay off the purchase balance. I remember getting calls from customers who were furious because they only had 75¢ or something left in the purchase bucket, and six months later it was only down to 71¢. DON’T MIX AND MATCH!
Solid advice for determining whether making a balance transfer will be beneficial and worth bookmarking if you think you’ll be making a credit card balance transfer anytime in the near future.