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7 Things To Watch Out For In A Low Balance Transfer Credit Card
By Sandy Naidu | August 13, 2008
Most of us would have either seen or heard promotions for ‘low interest rate for balance transfers’ or ‘zero interest rate for balance transfers’. If you are struggling to pay off your current credit card balance and are battling the interest accumulation on the card then you might be tempted by these low or zero rate balance transfer cards.
With any financial product there are lots of things that you need to watch out for before you get all excited about the offer. Here are the 7 things that you need to look out for before you sign up for this offer:
Length Of Introductory Rate
Be it a zero per cent introductory rate or a low introductory rate, you need to first find out how long this introductory rate will last for. It is usually less than year.
Fees
They might charge you a fee for transferring the balance over. If so, find out what the fee is. Also find out what the regular annual fee is. Compare it with what’s on offer in the market.
Interest Rate
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You need to check two rates here:
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These credit cards usually tend to charge a higher than market rate for all unpaid balances transfers (after the introductory period). If you don’t pay off your balance within the introductory period, then you might lose out on the benefits of switching to this card in the first place.
Interest Free Period
Find out what the interest free period is before and after the introductory period, Some cards don’t offer any interest free period during the introductory period.
Canceling The Old Card
Some cards are very difficult to cancel. Before you sign up with the new one, find out what you need to do to cancel the old one. If you sign up for the new one, transfer the balance but are still left with the old card then you will be paying the annual fee (even if you are not using the card).
Time Lag For The Balance Transfer
Once your balance transfer is approved by the new card, don’t assume you can stop paying the interest on the balance to your old card issuer. There can sometimes be a time lag between when the approval happens and when the balance is credited in the old account. So during this time gap you might have to pay interest on both accounts. Paying interest on two accounts might actually wipe out any savings you might make by switching to this new card.
You need to check when the new card actually starts charging you interest - from the time of approval or only after the balance is transferred from old to new. If it is the former then beware of the dangers and speak to them in advance about the potential time lags.
Where Are Your Payments Going
This is the real big one. Assume you transfer 5000 dollars from your old card. Your new card has zero interest rate on balance transfers and 14% for your ongoing use of the new card. Assume you made 1000 dollars of purchases using the new card. At the end of first month, you pay 1000 dollars. Now, some cards will apply your payments first towards to lower interest rate portion - this means 1000 dollars you paid will go towards your 5000 dollars balance transfer - and so you will be charged interest on your purchases of 1000 dollars (purchases made using the new card).
Some cards will start applying payments towards lower interest rate portion right from the beginning and some might actually start using this tactic only after you fall into defaults or arrears (i.e. if you had to pay a minimum of 1000 dollars at the end of first month but you paid less than 1000 dollars).
You will make best use of these low introductory rate for balance transfer cards if you transfer your balance and don’t use the card for any new purchases - make use of the low rate and pay off the balance before the introductory period ends and only then use the card for new purchases.
Read the fine print, do the comparisons before you sign on anything.
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One Response to “7 Things To Watch Out For In A Low Balance Transfer Credit Card”
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August 27th, 2008 at 7:44 pm
[...] Here is the trick - The $2000 will be applied first towards your lower interest - i.e. it will be applied towards your balance transfer. So though you were good and paid off the new spendings, you still end up paying 20% interest on your new spendings. Read my post about 7 Things To Watch Out For In A Low Balance Transfer Credit Card. [...]