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Low Interest Balance Transfers
By Gary Foreman
Dear Gary,
Can you explain all the hype and offers having to do with transferring
amounts from one card to another or using checks at a very low interest
rate? I get so many offers I figure there's a reason these credit card
companies are pushing people to do it. I just don't know what that reason
is. Thanks!
Ellen
Ellen is wise to ask why the credit card companies are begging to give her a
good deal. Understanding what they get out of it can help her avoid
unpleasant surprises later.
According to Credit Cards Magazine, credit card profits in 2004 were the
highest they've been since 1988. Experts believe that the credit card market
is 'saturated'. So on average for every new account an old one is closed.
The banks that issue credit cards are in a competitive battle for new
accounts. And they know that not all accounts are equally profitable. The
ideal customer uses the card often, is always paying interest on an account
balance and pays the minimum amount each month without fail.
Banks are also worried about borrowers not being able to make their
payments. So the trend is for credit card companies to segment their offers
based on the credit-worthiness of the cardholder.
Combine those two and you'll find the bank's ideal customer. They are
aggressively going after customers who carry a balance, but still have a
good credit record. As a result, Ellen gets offers for a low interest
transfer.
The bank can make money on a low-interest account in a number of different
ways. For instance, Ellen may be required to pay a 'balance transfer fee' of
3% or so to move the balance to the new card.
The bank knows that Americans charge $1.5 trillion per year. There's a small
merchant fee on every credit card transaction. They like it when Ellen uses
her new card.
They also hope that Ellen will continue to run a balance on her low interest
card. Once the low interest period ends that they can charge Ellen 15% or
more on the balance. It doesn't take long for them to make up any interest
that they gave up to get the account.
Plus, the low interest offer may only apply to balance transfers. Any new
charges Ellen makes could be at the regular interest rate.
And the monthly payments she makes will be used to pay off the low interest
transferred balance first. That leaves the new charges unpaid to run up
regular rate interest charges.
Ellen needs to read the fine print on the credit agreement. There are some
additional dangers lurking that she'll want to know about.
The bank is concerned about delinquencies. So Ellen's low interest deal
probably has a clause that would increase the rate if she's late on any
payments. Typically called a universal default clause they allow the bank to
raise her rate substantially if she missed a payment to any of her
creditors. Not just this account. Any account. So Ellen doesn't want to get
too cute waiting until the last minute to make her monthly payments
.
She also needs to know that it's unwise to continually jump from one low
interest card to another. Many consumers mistakenly think that's the best
way to beat the system.
If she begins jumping she'll lower her credit score. Part of your score is
based on how long your business relationships have lasted. Opening and
closing accounts each year won't help. A lower score will make it more
expensive for Ellen to borrow again (including auto and home loans).
The low interest transfer does offer Ellen an opportunity. It's a great time
to pay down a credit card balance. That's much easier to do when you're
paying little or no interest.
So should Ellen switch to a low rate credit card? If she hasn't done so in
the past and reduces her balance it could save her some money. Picking the
right card requires finding the best offer for her particular needs. That
can be somewhat complicated. Ellen will want to use one of the web tools to
help.
What's the bottom line? The banks offer low rate transfers because they know
that they'll make money that way. And Ellen should only play if the transfer
will make money for her, too.
Gary Foreman is the editor of The Dollar
Stretcher.com website. If you'd like to save time and money, you'll find
hundreds of ways to "live better for less" at
TheDollarStretcher.com. Including a
tool to help select the best credit card. Visit today!
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