Low or no interest balance transfer offers from credit card companies can be a boon, but they can also trip you up. Here’s what to be aware of if you are considering a balance transfer offer.
(For more articles on the wise use of your credit card, see our Using Credit & Debit Cards topic area.)
If all you pay on your card is the minimum required payment, the credit card company can apply it wherever it wants, which is usually to the balance with the lowest interest rate. The company does not have to split the payment among the various balances or follow your directions to apply it to a particular balance.
Say you have an introductory 0% APR (interest rate) on your transferred balance and a 15% APR on purchases you make on the card. The company makes more money if it uses your payment to pay the balance transfer because it isn’t earning any interest on that. So, it will apply your payment to the transferred balance first.
If, however, you pay more than the minimum required payment, federal law generally requires that any amount you pay above the minimum be applied to the balance with the highest interest rate.
Credit card companies sometimes use low interest rate offers on balance transfers to get you to reinstate stale debts (debts you already owe the company or ones they purchased from another creditor), on which they could not legally collect by suing you.
Check the fine print on any cards on which you transferred a balance. If you didn’t realize you were renewing an old, stale debt, write the company and tell it to cancel the card and remove the old debt from it. Explain you did not understand that you were agreeing to pay a debt that was too old to be collected. (To learn more, see Time Barred Debts: When Creditors Cannot Sue You for Old Debts.)
The offer may tell you in huge print that the APR is 0%, and you might reasonably think that means there is no charge on the transfer. Not true. Usually there is a “balance transfer fee” of up to 4% or so of the transferred amount. So on a transfer of $1,000, you would immediately owe $1,040.
If you do get a low interest rate on a balance transfer, don’t put any new purchases on the card, and be sure to pay off the balance before it resets to a much higher interest rate.
This is an excerpt from Solve Your Money Troubles, by Margaret Reiter and Robin Leonard (Nolo).