Credit card balance transfer
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|Credit · Debt|
This process is encouraged by most credit card issuers as a means to attract new customers. This arrangement is attractive to consumers due to incentives offered by the new bank or the credit card issuer. Examples of such incentives are low interest rates, an interest-free period, loyalty points or some other device or combination of incentives. These means of attracting new clients are invaluable to the credit card company, which uses this process to secure new client accounts, and detrimental to previous competing credit card companies.
An order of payments for every credit card specifies which balance(s) will be paid first. In nearly all cases payments apply to lowest-rate balances first and the highest-rate last (however some countries, like Australia and Germany, require that payments are applied to the highest-rate balances first). Any balance under a teaser rate or fixed rate will be paid off sooner than any purchases or cash advances, which usually have the highest . By avoiding making purchases or taking cash advances altogether, the borrower can ensure they maintain the full benefits of the original balance transfer.
The process is extremely fast and can be concluded within a matter of hours in some cases. Automated services exist to help facilitate such balance transfers. Other similar services do exist, but they may not be free to use.
Decisions on whether or not a card holder should transfer one's credit card balance depends on a combination of three things:
The rate on the new promotional offer. This is the normal on a credit card. The lower this rate, the better for the consumer and the worse for the credit card company. The transferred balance will be subject to same rate as the card's purchase rate. Occasionally, the same terms will apply as to purchases that may be interest free until the payment date for the statement on which the transfer appears. More often, such transferred balances move immediately to the full purchase rate. Credit card balance transfers involving transfer of funds from a high credit card or a store card to a low or zero-APR credit card will result in a reduction in monthly interest fees for the card holder.
The new card company will offer an especially low rate compared to the previous credit card company offers to new customers to entice them to transfer their balance. It is a lure for catching new customers. With an extra low initial rate, transferring customers have lower than normal fees which ultimately means lower initial monthly outflows of money to the credit card company. The 0% rate promotion is the most common when a new credit card account is opened.
Length of promotional rate.This teaser rate is temporary. The duration of teaser rates vary from (typically) 6 to 15 months, after which the remaining transferred balance is subject to purchase rate. Teaser rates in the UK can often be longer than in North America, with (typically) 6 to 35 months available for UK balance transfers. Failure to ensure the account is current (payments made on time) may result in the withdrawal of the offer rate. Customers should pay attention to the length of time of the opening offer, since once it is over there is a sudden increase in rates. This increase is the credit card company's method of making extra profits to make up for the losses of charging the lower introductory rate. Of course, this can be countered by switching to yet another credit card company.
A low rate that is fixed until the transferred balance is paid in full. This type of offer is usually guaranteed only as long as the account is current (see Teaser rate). Whilst this allows the borrower to save interest on their existing debts without the need to initiate further balance transfers once a teaser rate offer expires, the fixed offer rate is higher than the limited duration teaser rate offer. (Typically, it may be between one-half and two-thirds of a fixed rate, fixed term personal loan)
A transaction fee is a commission earned by the credit card company earning one's business and is a direct transfer of money from the user to the credit card company. This varies from (typically) 1-5% of transferred debt - sometimes with a maximum capped amount, but otherwise an uncapped percentage.
Because transferring to new credit cards often results in lowered rates, one can repeatedly make use of this process to save quite a lot of money over the years. The idea is to switch to a new credit card the moment the previous one's teaser rate has expired. There is a caveat: the credit card contract may include a clause preventing the credit card holder from transferring the balance a second time within a certain period of time. There may also be ways of extending the teaser rate or at least preventing it from disappearing prematurely.
To deter this type of behavior, many credit card issuers have stopped offering no fee balance transfers. Additionally, under pressure from various Federal agencies, card issuers have raised minimum payment requirements to ensure cardholders actually pay off their balances. These changes have made it less attractive to carry debt, despite any promotional APR that may be included in the offers.
- E. Thomas Garman; Raymond Forgue (2009). Personal Finance. South-Western College Pub. p. 196. ISBN 978-1-4390-3902-1.
- Section 366(2) of the German Civil Code (Bürgerliches Gesetzbuch - BGB).
- Fowles, Deborah. "Your Monthly Credit Card Minimum Payments May Double". Financial Planning. About.com. Retrieved 22 March 2012.
Under pressure from the Office of the Comptroller of the Currency (which regulates national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit.