Credit Card Balance Transfer Dangers

A reader Scott had written in with a very good question:  “Have you looked into the “scam” perpetrated by the cc co’s when they offer you a low-rate bal transfer, but also charge you interest on your purchases… so your true int rate can be much ore than that low “teaser rate” you were offered!”

Scott, you are exactly right. Lets not forget that the credit cards are in it to make money, so even though you think you are getting a great deal with a zero percent balance transfer there are always catches.

Here is how it works:

When you get a balance transfer any money you pay on your monthly statements pays the balance transfer first. So any purchases you make sit behind that balance transfer amount and earn interest at the purchases interest rate. Those purchases won’t start to get paid off until the total balance transfer is paid off.

One thing they do to attract you is to offer a zero percent balance transfer and then some sort of bonus after your first purchase. So you already have a purchase earning interest behind that balance transfer so that you could get the bonus. On the terms and conditions for the card, you will usually see something like this:

How do we apply your payments? We apply your payments to low APR balances first. You cannot pay off higher APR balances until you pay off lower APR balances. That means your savings from any promotional APR offer will be reduced if you make purchases or cash advances that have higher APRs.

My advice to you is that if you get a card with a zero or low percent balance transfer, do not use that card for purchases. Just cut up the card and when you get the statement just make the monthly minimum payments until the balance is paid off. Use a different card for purchases that way you can track exactly what is going on.

Another thing to beware of is the balance transfer fees. A few years ago most all cards offered no balance transfer fees. Now you are seeing the opposite, where most are offering a fee of 3% with a $5 minumum and no maximum (these fees vary among the different card providers). So be careful here since if you are balance transferring $10,000 you are going to get hit with a $300 fee immediately in this example. Always read the terms and conditions on the application. They must show you those fees there.

I hope this gives you a little insight into how the credit card companies make money on balance transfers. There are 0% balance transfer deals with zero fee deals out there, you just need to review the terms for each offer to make sure it is fee free as they are not going to make that info obvious to you. And be smart about it. Keep your balance transfers and purchases on seperate cards. That way you don’t have to try to figure out how you are being charged interest and fees.