An article by BudgetQueen
You get that offer in the mail from either your credit card or a new credit card to transfer an existing balance with no APR for several months. You think to yourself: “Yes, I do pay a lot of interest every month on my credit card. What if I transferred the balance to the new card? What can it hurt?”
Well I am here to discuss the ins and outs of balance transfers. Yes, I have done it as well. I have done it successfully, but I have also noticed the little traps that may get you.
Chapter 1. Credit cards want your business
Remember that this new credit card is not your "buddy." Credit cards, like any other business, are in business to make money. They know that your other credit card has probably made a lot of money off of you in interest charges and they want a piece of the action. You are a good credit risk – they know you pay your bills every month or they wouldn’t want you. But they also hope that you may not be able to pay off the balance for a while — long after the "honeymoon" stage is over.
Chapter 2. Don’t forget the transfer fee!
The new credit card immediately makes money off of you — the "transfer fee." Sure transferring you over costs the company some more. People are involved in creating your account. So it makes sense that there is a transfer fee — but sometimes it is a lot more than you realize.
The fine print always says what the transfer amount is and it usually ranges $5 minimum to a 3 to 5% interest charge on the whole balance. This means that on a $5,000 balance, there is a one-time fee of $150 (3%), or $200 (4%), or $250 (5%).
They will tack this onto the amount that you will owe. So your $5,000 immediately turns into one of these amounts once it reaches the new card. It is not uncommon to say to yourself at this point; “It is OK, because that amount is what I would have paid as a payment to my old card.”
Chapter 3. Your monthly payment requirements may not go down
When you get your new bill, the new credit card may determine that it wants a certain amount each month. Sometimes this payment is more than what you are paying with your old card. If you are changing to the new card for smaller payments – you may be surprised that it doesn’t happen. Just plan on paying the same amount. If it is less, pay the same amount as before to get it paid off quicker.
Chapter 4. Make the payments on time!
Be aware that with a new card, there will be a new payment structure. You may accidentally shred and recycle the new statement not realizing that it is your new card payment. But be aware that not making a payment on time can void the whole “no interest for 18 months” and you may have to start paying 24% or more for the oversight. Your old card may have been forgiving for a mistake like this. Your new one may not be.
Chapter 5. New purchases
Remember that new purchases on this card will probably not fall under the “no interest.” If you need your card for an emergency, the card may take that balance and put it on your balance but still charge you interest – and often it is a big interest charge! Plan on not using this card for any additional purchases until the transfer is paid off.
Chapter 6. Be aware of the terms of the new card
Once the months where you don’t pay interest (aka “the honeymoon stage”) you will now have a new interest payment on your card. What is it? Is it a decent rate? 10%? 15%? Or is it a large amount? Remember that the amount you pay doesn’t double between 9% and 18% — it triples (see article “Change the way you feel about interest rates”). That is a big difference!
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Chapter 7. What you are doing vs. what you are not doing
Although your monthly payment and interest is probably going down (otherwise, why would you transfer), it it is not "paying it off". Plan on making the same payments to this new card that you were to the old card, so you can get it paid off quickly. Think of the old saying "robbing Peter to pay Paul." Paul may have a better interest rate and seem friendlier up front, but Paul may ultimately have a temper and demand it all back quickly — and demand a lot more than the original amount (no offense to any "Pauls" out there — in fact my son’s name is "Paul")
The bottom line is that it is smart to try to get a better interest rate. Your “tried and true” card may give you a similar deal if you contact them saying that you got a better offer. However, if you know all of the rules associated with the balance transfer, and you can be strong with this transfer (and not spend any more money on it), then it may you hundreds in interest payments.
