August 30, 2007


Transferring debt using low-rate balance transfer offers provided by credit card companies is commonplace. As with any financial decision, there are pros and cons to consider in this matter. I don’t want to focus on weighing the merits of balance transfers. Rather, I want to address what you should look [look out] for if you’re considering this strategy as a method to get out of debt more quickly …


Look past the 0% offers. This may sound counterintuitive, but the best offers [for long-term transfers] typically are not at 0%. The 0% offers that come in abundance are typically for 6-12 months with a 16% or 18% rate to follow. Knowing the duration is normally limited, is it any surprise to hear that 86% of offers between January 2005 and September 2006 were 0% offers? Obviously this is a problem if the balance isn’t paid off by then. Most “fixed for life” transfer offers are in the 2.9% to 5.9% range. 0% fixed for life offers are out there, but are few and far between; 7.5% of the 0% offers, many of which have other catches, keep reading ...

Look at the costs. In the “good old days” finding a 0% no fee balance transfer was a piece of cake. Those days are long gone. No fee transfers are nearly extinct – in addition, many companies that traditionally charged a fee (commonly a 3% fee with a $50 or $75 maximum) have removed the maximum so that if you’re transferring $10,000 – that 3% fee would tack on $300 to the transaction (in other words, a year worth of interest in the no fee/2.9% offer).

Look at the facts. It should come as no surprise that these types of offers are marketing ploys to play with our human psychology. Obviously the company is making money or they wouldn’t do it. Smart Money
has a tool on their website that will enable you to plug in the numbers related to the balance transfer to determine what it will really cost.

Talk to your current creditor. Before diving into the murky water, a suggested first step is to call your current creditor [with the offer you’re considering in hand] and ask for something comparable. Obviously they want to keep your business. This will also be much better for your credit than continually opening new accounts to ‘hop’ between.

Use only for transfer. If you decide to transfer a balance, make sure you don’t use the card for anything else (i.e., everyday purchases). According to Mintel Comperemedia (a company that monitors direct-mail solicitations), nearly ½ of balance transfer offers also include promotional rates for new purchases. Enticing? Keep in mind that any payment you make on the card will go to the smaller interest rate and the promotional rate will eventually go up. Some companies will require a certain number of purchases (often 2 or more) or a minimum dollar amount of monthly purchases (often $35+) in order to receive the special balance rate. Be cautious!

Beware the bait and switch. Beware the offers for rates “as low as” … essentially that means that if you have excellent credit we will offer you X, but if you don’t, you’ll get a much less desirable Y. Some suggest responding to transfer offers over the phone so that you can cancel the application if the terms don’t meet your liking.

Universal default. You don’t have to read far to see that doing balance transfers isn’t for the faint of heart – it’s also not for the individual that has a tendency to miss payments. Many creditors employ a ‘universal default’ strategy, meaning that a missed payment to any creditor (doesn’t have to be the card with the deal) will immediately result in the interest rate being set to the default rate – some companies will jump the rate to 30% for a single infraction … ouch!

Make sure you look before you leap. Review the Financial Tip archive as well as the credit card section of the OFS website
to aid in learning about other credit card-related issues …