Define Balance Transfers
A balance transfer constitutes the movement of a debt from one credit card to another. If you owe money on your current card, you may receive an offer from another card company to pay off the balance by transferring the debt to their new card, where you will have a lower interest rate. But when you analyze the details of the offer, and consider the effect of the transfer on your credit rating, you may decide to decline the offer.
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Transfer Fee
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Many balance transfer offers come with a transfer fee (sometimes called a transaction fee). In some cases, the credit card company charges you a flat rate for the transfer. In other cases, they will charge you a percentage of the amount you transfer. Fixed fees typically run from $25. to $40. Fees based on the amount transferred range from three to four percent.
Consideration of the Transfer Fee
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Often the amount of the transfer fee seems relatively trivial. If you have a balance of $3000. on your existing card, and transfer it to a new card with a 3 percent transfer fee, this will cost you $90. If the new card has an interest rate 3 percent lower than the old card, and you maintain that balance for one year, and then pay off the card, the transaction cost equals the interest rate savings. If you pay it down over a year instead, your average balance equals 1/2 of $3000., or $1500. With your new rate you have saved 3 percent of $1500., or $45. But to get that saving, you incurred a $90. transfer fee. And the new card company added the transfer fee to your balance the moment they transferred your balance, so from then until you pay off the card, you are also paying interest on the transfer fee.
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The Introductory Rate
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Almost all balance transfer offers come with an introductory interest rate, which may be as little as 1 percent, or even 0 percent, for some limited length of time. In some cases, transferring the balance for the sake of the introductory rate makes sense. If you pay off the balance before the regular rate kicks in, this can save you money. But if you do not, then you need to consider other factors. You may have a fixed rate of 9.99 percent on your current card. Even if the new card's regular rate equals 9.99%, it may be a variable rate with a stated maximum as high as 24.99 percent, or in some cases even higher. You have no control over these rate changes.
Details
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Before accepting a balance transfer offer, check to see if the late payment penalties on your new card equal the late payment penalties on your old card. Many low rate cards, and cards with low introductory rates, charge high late payment penalties. Also, check to see if your new card company has a policy of moving due dates for payments. Some large banks have made a practice of this, with the result that many good consumers inadvertently miss their payment due date, and get slapped with a penalty. (On July 1, 2010, this practice becomes illegal). Be sure to find out if your prospective new card comes with an annual fee. That also increases your effective interest rate.
Credit Rating Impact
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Credit card rating companies, and creditors, like to see a certain amount of borrowing activity on a credit report. Beyond some point, however, your credit will suffer if you have too much credit card activity. If the maximums on all your cards add up to more debt than creditors want you to carry at your income level--even if you haven't actually charged that much--your credit rating will go down. If you regularly accept balance transfer offers, even if you cancel the old cards, the excessive card activity will lower your credit rating.
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