Editorial Policy

The New Rules of Balance Transfers

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By Eva Norlyk Smith, Ph.D.
August 12, 2009

Back in the heydays of easy credit, anyone with decent credit could apply for a credit card online, and moments later, have a balance transfer of $5,000-10,000 heading their way.

Today, unfortunately, the rules of balance transfers have changed. Good balance transfer offers are harder to come by, and even if you can get one, there are more reasons than ever to think twice before taking advantage of it. Here are the new rules of balance transfers and how to best navigate them.

1. Similar offers, few deals.

Anyone searching online for credit card deals will still find a great selection of balance transfer offers. But look beyond the packaging, and you’ll find that good deals are hard to come by. Not only are the 0% or low APR periods shorter, but the balance transfer fees are higher, ranging from 3 to 5%, and few transfer fees are capped.

What to do: Read the fine print carefully. A 3-month $10,000 balance transfer with a 0% APR and a 3% balance transfer fee would cost you $300, the equivalent of a 12% on an annualized basis. That’s not really a good deal.

2. Finding the best deal got a lot more complicated

Choosing a 0% APR deal for twelve months with no fee is a no-brainer. But these days balance transfers come in many shapes and forms, and it can be hard to determine which is the better deal. For example, which of the following is the best offer?

a) a 0% APR transfer for three months with an uncapped 3% balance transfer fee,
b) a 1.99% APR balance transfer for six months with a 5% balance transfer fee capped at $150
c) a 4.99% APR balance transfer for twelve months with a 5% balance transfer fee capped at $150.

The answer: it depends. It depends on how much of a balance transfer you plan to make and how long a period you need the balance transfer for.

What to do: When planning to make a balance transfer, look through the offers available to you and calculate the actual cost and the real annualized percentage rate of each deal to get a basis for comparing balance transfer offers.

3. Applying online for balance transfer cards has become risky

Check the fine print carefully: many card issuers advertise 0% interest rates for up to twelve months. In practice, this means that you may only be approved for a 0% APR for three months, and you still pay the same balance transfer fee of 3-5%.

Similarly, the purchase APR that will apply to the card after the balance transfer expires may be listed as as low as. Again, this means that only consumers with the very best credit will get the low APR. When the credit card arrives in the mail, you could end up with an APR that’s twice as high as that advertised.

What to do: When applying for a credit card online, don’t make any balance transfers while applying, instead wait until the card arrives in the mail. Then study the terms carefully to see if that balance transfer offer is still worth it.

4. Less leniency, tougher punishment

In the current economic climate, card issuers are far less forgiving than they used to be. One late payment, and you could see that 0% APR jump to the purchase APR on the card, which could run as high as 22.99%. Use more than 90% of the credit limit on the card for a balance transfer, and you could see the minimum payment due jump to 4% a month instead of the typical 2 to 2.5%.

What to do: Pretend that you’re walking on egg shells, because you are. Don’t make a single late payment, not even by an hour, and keep short-term balance transfers well below 80% of the card limit.

5. Balance transfers could create a domino effect

Credit scores are more important than ever. Carrying high balances on your credit cards could hurt your score, in turn affecting other parts of your finances. The amount of credit you use of the overall amount of credit you have available makes up 30% of your credit score. To avoid affecting your credit score, keep that ratio low, preferably at around 10% and definitely below 30%.

What to do: Calculate how much total credit you have available over all your credit cards and make sure that all outstanding credit card debt, including the balance transfer you’re planning to make, will make up less than 30% of your total credit available.