The credit card debt is among the most frequent, burdensome types of debt US consumers are presently struggling with. Until recently, the widespread availability of credit – particularly in the form of credit cards – made credit card debt pretty much a fact of life. Some consumers had a higher credit card debt load than others, some made only the minimal monthly payments imposed by their card issuers, others dutifully paid their balances in full every month, but neither the more credit-wary nor the more liberal-handed of us registered credit indebtedness as topping our list of financial concerns. Nowadays, things could not be more different. Due to the very aptly-named “credit crunch”, credit – defined as a form of borrowing in which one party (the lender or creditor) provides to another (the borrower or debtor) with access to a certain amount of resources for a pre-defined interval – has become a scarce resource. Banks, which a short while ago were going out of their way to make credit available to consumers (engaging, as some analysts have claimed, in careless and inappropriate lending), have tightened terms and conditions both for newcomers to the consumer credit market and for consumers who already have considerable outstanding credit card balances.
The shift in credit availability has dealt a serious blow to a large number of credit cardholders, which have seen the costs of accessing credit skyrocket due to soaring interest rates, or found themselves in the even more unpleasant position of having banks significantly slash their credit limits with little or no prior warning. Within this context, for card debt-laden consumers, taking out a new credit card, would seem a downright irresponsible decision – with a single exception: if the consumer in question qualifies for, and decides to take out a so-called balance transfer credit card, also referred to as 0% balance transfer credit card. In a nutshell, as its name suggests, a balance transfer credit card is a credit card which allows a consumer to transfer the balance (the amount of money owed) in a credit card account to a different credit card account at another credit card company.
The credit cards transfer balance
Usually, balance transfer credit cards are designed to allow holders to transfer a high-interest credit card balance to a credit card which comes with a lower interest rate (at least for a specific time span), thus presumptively allowing for consumers to pay smaller finance charges and save money. Credit card issuers which offer balance transfer credit cards in fact offer to take over a consumer’s existing credit card balance (held with a different issuer), thus effectively gaining a new customer. In order to persuade consumers to make the switch – which is, of course, in their best interest – banks and credit card companies offer significant incentives to their would-be customers, for example a very low interest rate or an interest-free interval for their new credit cards. Typically, the company which presents a consumer with a balance transfer offer volunteers to charge an introductory APR of 0% (APR = Annual Percentage Rate, a numerical expression of the total cost of borrowing for a credit card loan). However, the 0% APR will only be kept for a limited amount of time, after which it will be adjusted to a different, much higher level.
The credit cards transfer balance
Needless to say, all banks and credit card issuers encourage consumers to initiate credit card balance transfers and move their credit card debt to them to the detriment of a rival lender. It is easy to see the reasons for this eagerness: credit card debt is a source of income for card issuers, and the equation is simple enough: more highly motivated, reliable customers, higher revenues. Under the right circumstances, consumers can also profit from such balance transfers; balance transfer credit cards may not be the answer to all their credit card debt-related concerns, but they can be highly efficient payment instruments, provided that they are handled with care and that holders are always fully aware of the terms to which they have agreed when undertaking the credit card balance transfer.
For example, if a cardholder pays off his outstanding balance quickly (that is, within the strictly pre-defined interval in which 0% APR is charged) he cardholder can potentially save hundreds, even thousands of dollars in interest charges. Another thing consumers should be aware of is that for every credit card they own, there is an element called an order of payments; this is essentially a list which states which balances are to be paid first and which will be paid last. Usually, lowest-rate balances will be paid first, while highest-rate balances will inevitably be paid last. Also, any balance worth less than the so-called “teaser rate” fixed by the company to which the balance transfer is made will be paid off faster compared to outstanding balances for purchases or cash advances, which typically carry a high-level APR. In other words, if a consumer who opts for a 0% balance transfer credit card refrains from using the card to take cash advances or to make purchases, he can continue to enjoy all the benefits that came with the original balance transfer.
What most of us are not aware of is that balance transfer credit card offers usually target consumers with positive, even stellar credit scores and credit histories. Not everyone who expresses a desire to take out a credit card balance transfer will actually qualify for one. As such, it is important to become familiar with the special, introductory rate which will apply to you in particular before making the initial transfer. Also worth remembering is that fact that even if a consumer does qualify for a balance transfer credit card, the terms and conditions imposed by lenders are subject to continual changes: as many of us will have painfully found out by now, credit card issuers have the right to alter crediting terms and interest charges at their convenience, without allowing consumers too much maneuvering space to change their options.
If you’re currently trying to decide whether a credit card balance transfer is the right path to take at the moment, you should answer three basic questions, whose answers will provide you with the data you need to make an informed decision. The first question that needs answering is – what is the normal interest rate on the balance transfer credit card you plan to take out? The second: what is the “teaser rate” used to entice you and encourage you to transfer your balance to a different card issuer. And thirdly – what kind of transaction fee is charged by the credit card company to which the switch is made? The answers to these three questions can help you make the right decision as to which are the best balance transfer credit cards available on the market. Sit down at your computer and draw up a comparative table in which you place the answers to the three questions mentioned above side by side. This will help you get a clear picture of what you’re offered and help you avoid a financial misstep that could easily drown you into even deeper debt than you were when you first started your balance transfer journey.
The first question mentioned above refers to the standard (normal) interest rate on the balance transfer credit card you plan to take out – how much is it and how does it impact your existing balance? The standard interest rate for the card needs to be as low as possible – the lower it is, the lower your cost of capital will be and the less profit the lender will make off you. You should know that the transferred balance must be subject to a rate that is equal to the purchase rate of the card, also known as the merchandise rate. Balance transfers that consist of transferring money from a high-APR credit card to a 0% balance transfer credit card lead to lower monthly outflows for the cardholder.
The second question mentioned above refers to the amount and duration of the “teaser” balance transfer rate. Remember that the ultra-low rate featured prominently (usually spelled out in large fonts) within a lender’s advertisements will not be maintained permanently: it is the hook, the lure for potential new customers and it will always be temporary, for the very simple reason that a 0% APR on balance transfers translates to less money for the card issuer. Lenders usually maintain the ultra-low rate for anywhere between 6 months and 15 months; upon the end of the promotional, low-interest interval, the remaining transferred balance will become subject to the balance purchase rate, which will result in a significant climb in credit card rates. Also, keep in mind that if you happen to miss any payments on your new credit card, the offer rate may be withdrawn.
Finally, the third question that will help you determine which are the best balance transfer credit cards has to do with the amount of the transaction fee charged by the credit card company to which you will make the switch. Typically, in order to transfer your balance to a 0% balance transfer credit card, you will have to face a transaction fee of between 1% and 5% (usually the fee is 3% or 4%, with a smaller number of companies offering 1% switching transaction fees). Also, in addition to the balance transfer fee mentioned above, another consequence of switching your balance onto a different card can impact your credit score. As you probably know by now, an application for new credit damages your rating, due to the fact that credit rating bureaus perceive it as a distress signal, an indication you’re having trouble balancing your finances and need extra funds.
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