Making Cents Blog

Balance Transfers: 5 Critical Factors to Consider

A balance transfer is a quick and easy way to lower your expense-to-income ratio and also save money on interest.  It’s simply using a low interest credit card to carry the heft of a high interest credit card.  And there’s nothing wrong with that, but you’ll profit by taking time to understand what kind of relationship you’re entering into.

Low APR credit card offers were something of a rarity after the 2008 financial crisis but now they’re back and starting to show up in your mailbox like Clearing House Sweepstakes letters.  Before calling the 1-800 number or activating anything online or otherwise, read the fine print that comes with the low-interest offer.

All cards are not equal, but all cards deserve a little scrutiny.  Make no mistake about it, a credit card agreement is a binding contract. Whether you end up in a better or worse situation is solely dependent upon you.  It’s all business.  The credit card issuer is usually a large financial (and largely faceless) institution and you’re an account.  How well you manage that account is what matters.  There are five important, in fact, critical factors you should consider before doing a new credit card balance transfer.

  1. Know your intro APR.  It isn’t hard to find out.  It’s usually spelled out in big print in the first or second paragraph of the letter you receive.  It’s usually somewhere between 0% and 5% and looks very attractive compared to what you’re paying on your existing credit card or cards.
  2. Know the terms.  How long does the promotional APR last?  It could be as short as 6 months or as long as 2 years.  Before accepting the offer, do a conservative review of your future.  Do you know you can pay the balance off within the low-interest time period or are you thinking you probably could?  You’ll never find “probably” in a financial agreement.
  3. And if you keep the low-APR card past the low-interest time-period, you are subject to an adjusted APR, which starts when the lower-APR expires and is usually in the neighborhood of 15%, and can be higher.  The lesson here is something that applies to life in general—know where you’re going before you get there.
  4. Be on the lookout for a couple of devious and disappointing details that might show up in the fine print.  For instance—a universal default clause that allows a credit card issuer to increase your interest rates if you make a late payment on any account, not just on their account.  Make one late payment and your 0% APR could turn into a penalty APR of up to 30%. That penalty rate is indefinite.
  5. There are also balance transfer fees.  These are determined as a percentage of the total amount that you’re transferring.  A typical fee is 3%, which means that a $15,000 transfer costs you $450.00 up-front before enjoying any lower-interest savings.  Also, transfer fees are no longer capped and can be as high as 5% although you may be able to negotiate the fee down.

An option to big bank low-APR offers is a local credit union where you usually find a more personal approach. There’s a good reason for that—commercial banks are publicly traded and work for their shareholders. Of course, credit unions also work for their shareholders, but the shareholders of a credit union are its customers.

Like many credit unions, Alliance offers balance transfers with low fixed APRs without annual fees or balance transfer fees. And there is no universal default clause with exorbitant penalty rates because you forgot to pay a bill.

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