If you’re thinking about taking advantage of a credit card balance transfer, watch out. Credit card issuers are using deceptive marketing techniques to lure consumers in with attractive promotions that promise zero or reduced interest for transferring a balance -- and then hitting them with surprise interest charges. If you’re not careful, you could end up making a huge balance transfer mistake.
Deceptive marketing for credit card balance transfers has gotten the attention of the Consumer Financial Protection Bureau, which recently warned credit card companies about the need to clearly disclose the costs and risks that come with promotional offers.
“We are putting credit card companies on notice that we expect them to clearly disclose how these promotional offers apply to consumers so that they can make informed choices about their credit card use,” said CFPB Director Richard Cordray.
While transferring a credit card balance to a lower interest card might sound like a good idea, it’s not always in your best interest. Before you make the decision to transfer a balance, you must read the fine print and understand the terms of the card you’re transferring your debt to.
“Before they sign up, consumers need to understand the true cost of these promotions,” said Cordray.
You have to do a balance transfer for the right reason, which means it’s essential that you have a plan in mind to aggressively pay down your debt. If you’re just looking to buy yourself more time, transferring your balance is not going to be worth it. And it could be costly if you transfer your balance to a card that is deceptive about its terms. Make sure that you avoid committing a balance transfer mistake or you could end up in greater debt.
When to transfer a balance
If you’ve racked up high debt on your credit card, you might consider transferring a balance to a new card that has lower interest and start aggressively paying it down. But before you make the switch, you should understand that this is only a temporary fix. You will still have to pay the amount you owe and the interest you have accumulated on the card. Don’t deceive yourself into thinking that you won’t have to pay back your charges just because you bounce your debt from card to card. That’s a dangerous game to play.
With a balance transfer, you’re essentially buying yourself time to pay back your debt so you can save money on paying high interest. You might be able to save yourself hundreds or thousands of dollars in the long run if you can pay back the debt you owe at a lower interest rate on another card. Keep in mind that some credit card companies -- despite advertising that says you won’t pay any interest -- might immediately charge you for anything you purchase on your new card after you transfer your balance. That’s one of the main reasons why the CFPB is putting credit card companies on notice.
Another reason you might consider transferring a balance is because it simplifies the payment process. If you’ve got several credit cards in your wallet, transferring a balance to one low rate card would make the payment process much simpler. Doing so would eliminate the need to remember multiple payment dates.
Transferring your balance from one credit card to another one will cost you money, of course. You’ll be charged a balance transfer fee, which will be a percentage of the total amount you’re transferring. The more debt you transfer, the bigger the fee. If you have a clear plan to cut down your debt and can shoulder the fees you’ll be charged for transferring, go for it. If you can’t afford the fee for transferring your debt, clearly you shouldn’t make that balance transfer mistake.
When to avoid a balance transfer
Sometimes it just doesn’t make sense to transfer your credit card balance. For instance, if the money you’ll save by transferring your debt isn’t more than the fee to transfer, don’t do it.
Another reason to avoid transferring: if you can’t afford to pay off your debt in time to take advantage of your new card’s introductory rate. Some companies may market low rate balance transfers , but won’t disclose the fact that consumers must pay off their promotional balance by their due date to avoid unexpected interest charges on everyday purchases. Even if that’s not the case for the particular card you choose, remember that the low rate will expire eventually and you might go from paying a 0-5 percent interest rate to a 12-18 percent one. That’s a big balance transfer mistake you want to avoid.
Another reason to avoid a credit card balance transfer is if you intend to do it over and over again rather than pay your debt off. Don’t deceive yourself into thinking you can avoid paying your debt by constantly transferring your credit card balance. Merely transferring your balance from card to card isn’t going to bring your debt down, but it might hurt your credit score. Bouncing your debt from card to card will hurt you in the long run because credit card issuers will view you as a risk if you have a low interest account and high debt, making it difficult for you to attain new credit in the future.
Finally, the reason you are transferring a credit card balance is to pay it off. That means you must have a plan in mind -- with an actual date of when you intend to pay off your debt and an idea of what it will take to get rid of it. This involves budgeting and finding way to contribute more to paying your debt off so that it’s eventually out of your hands. Truthfully, you should not charge a single thing to the card you’re transferring your balance to unless you’re facing an emergency situation. You won’t get rid of your debt if you keep adding to it. Plus, as the CFPB has warned, some credit card issuers might immediately charge you interest for purchases you make on a new card.
Tips to help
If you decide to take advantage of a balance transfer promotion, the CFPB recommends you follow these tips:
Avoid the interest: Consumers that do not carry a balance can take advantage of promotional rates and avoid unexpected interest if they don’t make new purchases with the card until they pay off the entire balance. To avoid interest charges on new purchases, these consumers should consider paying with cash, debit, or another credit card that doesn’t have a balance.
Make payments on time to avoid surprise charges: Consumers should be sure to make payments on time. For promotional and deferred-interest balances, consumers should pay off the entire balance before the end of the promotional period.
Compare the interest rates among credit cards: Consumers that carry a balance on all their credit cards should compare the interest rates among their cards to decide which is the best deal for new purchases. These consumers should also consider paying for new purchases with cash or debit.
Percentage of Monthly Credit Card Payments Toward Interest
|Time to pay off||2 years 8 months||11 months||7 months||7 years 4 months||2 years||1 year 2 months||2 years 4 months||11 months||7 months|
|Total principal paid||$5,000||$5,000||$5,000||$10,000||$10,000||$10,000||$5,000||$5,000||$5,000|
|Total interest paid||$1,215||$430||$274||$7,508||$1,841||$1,084||$557||$217||$141|
|Portion of monthly payment paid toward prinicipal||80%||92%||95%||57%||84%||90%||90%||96%||97%|
|Portion of monthly payment paid toward interest||20%||8%||5%||43%||16%||10%||10%||4%||3%|
|Monthly payment to pay off in 1/2 the time||$351||$875||$1,295||$307||$988||$1,511||$378||$855||$1,273|