Have you every received a balance transfer for offer in the mail? Of course you have! Such offers are sent out every week by multiple credit card companies trying to get consumers interested in transfering their credit card balance from their existing card to a new card.
With offers of 0% APR for X number of months one can get interested quickly. And why wouldn’t you? If you’re carrying a large balance and getting charged high interest rates and fees on your current card, it can seem like a good deal to move to another card with 0% APR. Your debt case is closed and the problem is solved. Right? Wrong!
You have to be careful! Credit card companies exist to make money. Shhh. Don’t tell anyone a I said that. They don’t care about you. They care about their net income! And they’re interested in getting that money from you, the person who needs to get out of debt, avoid high interest charges and spend money wisely.
How Balance Transfers Work
Here’s the deal. Credit card companies offer 0% APR balance transfers hoping you’ll spending money on that new card. In most cases, people do transfer money and spend on the new card (even when they know they shouldn’t). Life happens, right? So, what happens to your great 0% APR deal that point?
New purchases, of course, get charged that high interest rate of say 13%. But, when you make a payment to the credit card company, they don’t apply your payment to the new high interest charge. They apply it to the $5000 you just transferred. Meanwhile, each month you’re getting charged 13% on those new purchases and not making any dent in paying them off. Here’s a good example from Smart Money:
If you were to transfer $4,000 to a card that carries a 9.99% rate for new purchases and make the minimum monthly payments (usually these are 2% of the total credit card balance), you would accrue an estimated $3,550 in new charges (assuming you charge a mere $50 a month) while paying off the transferred balance. The true APR you’d pay in that scenario: 4.58%. That’s still better than 9.99%, but it isn’t the 0% APR deal you signed up for.
Let’s consider one more scenario. You have an existing balance on your current credit card. The same company (not a new one) offers you an opportunity to transfer a balance from another card you might have. The card company loves that you have a balance on your existing card and that you continue to carry it from month to month. So, you decide to transfer a balance from another card. After all, you like the sound of 0% APR and consolidation will just make your payments easier each month. The same scenario applies as above. All of the sudden the payment you’re making no longer goes to your previous balance. The payments now go to the new transferred balance while your existing balance gets charged the high APR.
Should You Transfer Credit Card Balances?
Is it still a good deal to transfer your balances? You can play the game. I know a lot of people who have been in credit card debt and decided to transfer their balances to a new card with hopes of making some headway. It can seems like it will provide some relief.
You might say you won’t spend money with the new card, but chances are you will. Most people do. Why? It’s an emotional relief to transfer your balance. It’s kind of like starting all over again (in a sense). But, you reason it’s okay to charge one time for some entertainment. And then it’s a charge for extra gasoline to see grandma. All of the sudden, you’re in a spiral of credit card usage and high interest charges because you’re not making a dent with your payments. You then look for the next balance transfer and your debt just keeps getting bigger and bigger.
So, if you decide to play the balance transfer game, here are a few things you need to keep in mind:
- Don’t every transfer a balance to a credit card that already has a balance. Again, your payments will be applied to the balance transfer amount versus the current balance costing you interest charges that might be lower than your existing card, but you’re actually paying for the 0% APR.
- If you transfer a balance to a new card, cut up the new card so that you can’t use it. Doing so will remove any temptations.
- Fix your spending behaviour first. Balance transfers are not the answer to getting out of debt. You have to stop using credit cards if you carry large balances on them.
What do you think about balance transfer offers? Would you/do you play this game?
Personal Finance Carnivals: Festival of Frugality: Simply Forties, Canadian Finance Blog; Carnival of Debt Reduction: Back to School Edition and Labor Day Edition
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