September 12, 2010

0% Balance Transfers - Read the Fine Print

I just opened a letter from a bank telling me that I was pre-approved for a 0% promotional offer for 12 months on a credit card.   Seems like a great deal..   If I had a large balance on another credit card at a 20-30% rate then I could save a lot of interest by getting this new card at 0% for a year and transferring the existing balance. 

Then I turned to the back page of the offer and saw the details.   The rate will go up to 24.99% after 12 months.  Ok thats not necessarily worse than I might be already.   But the kicker was that the balance transfer fee was "$5 or 4% of the balance, whichever is higher".    You're actually paying a 4% fee up front in order to transfer the balance.    So you're effectively paying 4% interest up front not 0%.  I remember years ago you'd get 0% promotional offers from credit cards and they would often have no fee for it or a relatively low fee that capped out at $25 or $50 or something like that.   Those may have been rare but I recall seeing offers like that.   Then later the credit cards started putting in % fees so you're paying them a % of the balance transfer.  Ideally you should look for a 0% APR promotion that no balance transfer fees.

The 4% fee is still not a bad deal especially if you're currently paying a high rate.   I'd rather pay 4% today and 0% interest over 12 months than pay 15%, 25% or 30% interest over 12 months as is typical for credit cards.

You should also pay attention to what rate the new card will end up at after the promotional period.  That 24% rate is fairly high and it should be kept in mind.  Of course 0% for 12 months is good so it is probably worth considering if you've got a large balance.   But I'd just keep in mind that after 12 months you'll be paying 24%.    What if your current card is at a fairly reasonable 14% and you don't currently have the ability to make extra payments?   If you get stuck in that 24% rate for years you'll pay more in the long run.

This is all just an illustration  and reminder of how important it is to read all the fine print in ANY kind of financial offer. Always read the fine print!

1 comment:

  1. I just transfered a balance to Discover Card. It has a 4% fee with 0% for 1 year. The 4% will be equivalent to 3 months interest on my old card. Still 9 months no interest. Then a fixed rate still lower than my old Chase card. The payment is a little higher but thats OK. I notice I'm getting more balance transfers in the mail. Banks must be doing better. I read the fine print for sure. We still need these balance transfers till we pay off all our debts. A necessary evil.

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