Avoid Bad Balance Transfer Cards

by News Guy on March 23, 2012

(Guest post by Jason Steele)

When credit card holders find themselves deep in debt, a balance transfer card can appear to be the perfect solution. With a promotional balance transfer, credit card debt that is incurring interest at a high rate is moved to a different account that has a lower rate, often 0%. Yet not all balance transfers are created equal. In certain situations it can be a bad idea to perform a balance transfer, even when receiving a 0% interest rate.

Short Term Balance Transfers

Most promotional balance transfers involve a tradeoff. Cardholders receive the promotional interest rate for a certain period of time, but must immediately incur a balance transfer fee. In order for this equation to work in the favor of the cardholder, the promotional period must usually exceed twelve months. This is because most balance transfers require a fee of between 3% and 5% of the amount transferred. The fee gets added to the cardholders balances and they immediately owe more than they had. Since there are many 0% APR balance transfer credit card offers that exceed twelve months, cardholders who open an account with a shorter promotional period are not receiving one of the most competitive offers.

Large Balance Transfer Fees

The other side of the promotional balance transfer equation is the transfer fee. While many cards charge a 3% fee, there are others that charge 4% or even 5%. These fees are often poorly understood by customers, and disclosed only where required by law. Since any savings realized by promotional interest rates will be offset by this fee, opening an account with the lowest possible fee is critical to the viability of this strategy. Cardholders should realize that any balance transfer card with a fee in excess of 3% is an inferior offer and that a credit card with no balance transfer fee offers the best savings opportunity.

Transferring A Balance To A Card With An Existing Balance

On occasion, cardholders will be presented with a balance transfer offer from a bank with which they already have an open account with a balance. When a cardholder accepts this offer, he or she has essentially created two balances within the same account. The previous balance continues to incur interest at the standard interest rate, while the balance transferred receives the promotional rate. Due to provisions of the Card Act of 2009, banks are then required to apply payments to the portion of the balance with the highest interest rate first. Therefore, cardholders will be paying off their original balance first, followed by their promotional balance transfer. This is an unnecessary complication that can prevent cardholders from simply paying off their balance transfer before the promotional financing expires.

By understanding the potential drawbacks of various balance transfer offers, cardholders can choose the best product for their individual needs.

This guest post was written by Jason Steele, a contributing author of http://www.smartbalancetransfers.com/blog.

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