Credit Card Trivia - Balance Transfers

(originally posted somewhere else in 2006 sometime)

If
your mailbox is anything like mine, you get several balance transfer
offers from credit card companies every week. They're non-stop. It's
enough to make you wonder if the shredding machine industry is in bed
with the credit card industry. I received offers last week ranging from
0% to 5.99%, with offer times ranging from August to "until it's paid
off." Sometimes these offers are worth a switch - most of the time, not
so much.

First of all, be cautious about accepting a balance transfer offer
that involves opening a new account. Your goal should be to get rid of
debt, not to open yourself up to the possibility of new debt. If you
are having trouble disciplining your spending then freeing up a credit
line by moving it all to a new card is just asking for trouble. Also,
opening up lots of new accounts can negatively impact your credit score.

Next, read the fine print. On almost every balance transfer you are
offered, there is a fee. Down on the bottom of the offer or on the
second page, in little teeny tiny letters, there will be something that
mentions a fee of probably around 3% of the amount transferred, with a
minimum of $5 and a maximum of $25-75 for each transfer. Those are the
ranges I've seen lately, yours may vary. If you move several small
balances over, you're going to pay several transfer fees. Those amounts
increase your ultimate payoff figure, of course.

Now read some more fine print. Actually, I'm not sure that this
shows up in the actual transfer offers, but if you're doing a transfer
to an existing card, you can bet that this next bit is in your account
agreement somewhere, and it's a doozie: Lower interest balances will be paid off first.
Let's say you have a credit card with a $2000 balance @ 18.9%, and you
transfer $2000 over at 2.9%. If you send in your minimum payment (4% of
the balance, for the purposes of this example - $160), here's how it
breaks down - and I'm being approximate here:

$2000 @ 18.9% annually = one month finance charge of $31.00

$2000 @ 2.9% annually = one month finance charge of $4.77

So, out of your $160 payment, there will be $124.23 left to put
towards your balance. It will get put towards the 2.9% balance. That
means the next month your finance charges look like this:

$2000 @ 18.9% annually = one month finance charge of $31.00

$1875.77 @ 2.9% annually = one month finance charge of $4.47

You just saved a whopping $.30 in finance charges for the month. Not
until you work through that 2.9% balance will you even begin to start
knocking down the 18.9% balance. And by then, the credit card company's
going to try to get you to take on another new transfer. Just keep in
mind that whatever rate you're getting on the transfer needs to be
weighted with your existing debt.

And for goodness sakes, if you're going to transfer a balance, transfer that 18.9% balance.

Also, keep in mind the time frame. If you only have six months to
pay off a balance before the rate jumps to something ludicrous like
24%, maybe it's not worth transferring. If you know you can pay it off
within that time and the transfer fees aren't outrageous, go for it.
Sometimes you'll even get transfer offers that are good until the
balance is paid off - I like those.

Finally - don't be late.
As I covered in previous post about credit cards, you are all kinds of
screwed if you're late on a payment. Any great transfer rates are null
and void after late payments, and you'll probably see other companies
raise your rates as well.

Balance transfers can help you get your debt under control - just be
sure you are actually the one in control, not the credit card companies.