With the new Credit CARD Act settled into place and the lending environment slowly improving, credit card offers are making a come-back—including balance transfer deals. However, while balance transfer offers have rebounded, they are not as appealing as a couple of years back, and it’s important to do the math to see if you’re really getting a deal. Here are five quick tips for how to select the best balance transfer offer:
1. Calculate the effective APR by annualizing the balance transfer fee. Almost all balance transfer cards now come with a transfer fee, usually between 3 to 5 percent. So in essence, a card advertising a 0 percent APR for twelve months, is effectively featuring a 3 to 5 percent APR. If that 0 percent APR intro rate ends after only six months, the 3 to 5 percent balance transfer fee turns into a 6 to 10 percent APR; for a three-month 0 APR card offer, the 3 to 5 percent balance transfer fee becomes an effective annualized interest rate of 9 to15 percent—not exactly the great 0 percent balance transfer you were looking for.
The bottom line: Look for cards with a long promotional period, ideally 18 months. If you have an excellent credit score, don’t’ settle for less than a twelve-month 0 percent APR promotional period.
2. Avoid “up to” offers, unless you have excellent credit. Be wary of balance transfer offers that promise 0 percent APR “up to” e.g. eighteen months. When the card promises an “up to” period for the promotional rate, or advertises an interest “as low as,” it means that only those with stellar credit can expect to receive the full advertised benefits. Consumers who don’t fall into the top tier of credit scores will get a shorter promotional period and higher APR after the balance transfer offer expires.
The bottom line: Avoid the uncertainty. You’re better off applying for credit card offers with predictable terms for the balance transfer offer and APR.
3. Check the long-term card APR. Consumers who can pay off their balance transfers within the promotional period have no need to worry about the higher interest rate that follows once the 0 APR intro expires. However, many cardholders who make balance transfers are looking at a long-term pay-off period. When searching for a card, estimate how long it will take to pay off the balance transfer with the monthly payments you can afford. Then calculate how much interest will accrue on the balance over that time period, after the promotional 0 percent APR expires. This will give you the true cost of that 0 APR balance transfer deal.
The bottom line: If you’re unable to pay off the transferred balance before the 0 APR expires, evaluate the total cost of making the loan and see if it’s still worth it. You might discover that while 0 APR sounds like a great deal, you’re better off with cheaper, long-term sources of credit, such as a home equity loan or mortgage refinancing.
4. Does the card offer 0 APR on purchases as well? Many cards offer 0 percent APR on purchases as well as on balance transfers. While that can be an added benefit, particularly since there is no transfer fee on 0 percent APR purchases, it also has drawbacks. For many cards, the 0 percent purchase APR expires before the 0 APR balance transfer rate. This could leave you paying high interest on purchase balances on the card long before the promotional APR expires, undermining some of the advantages of that great 0 APR deal.
The bottom line: If you want a card with a 0 percent intro offer on both balance transfers and purchases, choose one where the promotional periods end at the same time.
5. Watch out for the effect on your credit score. Balance transfers tying up a significant percentage of your available credit will affect your debt-to-credit ratio, a significant part of FICO scores. The higher the ratio of debt to available credit, the greater the effect on the credit score. In general, it’s best to keep the debt-to-credit ratio around 10-20 percent, and definitely below 30 percent.
Likewise, if you repeatedly apply for new credit cards in order to transfer debt from one credit card to another, the frequent credit inquiries will draw down your credit score. So playing a musical chair game of transferring debt from one 0 APR card offer to another will make it more difficult to get approved for the best credit card offers in the future.
The bottom line: Frequent balance transfers will cost you—and not just because the 3 to 5 percent balance transfer fee will add up over multiple moves. Only take out what you can pay off before the promotional period expires, or you could paying interest upward on 19.99 percent on that great 0 APR deal.