The average credit card holder has three credit cards, according to 2010 research by the Federal Reserve Bank of Boston. Based on the number of credit card offers most of us receive, it seems that banks would like us to have many more. Credit card companies often encourage new customers to transfer balances from existing accounts with competing card issuers. As an incentive, they may offer a low- or no-interest introductory rate. However, balance transfer fees and other costs may apply.
Why Do Banks Offer Transfers?
When a credit card issuer approves you for a new credit account, the balance you owe is zero. Of course, banks can't charge you interest on a zero balance, so they offer you the option of transferring the balance from another bank's card to theirs. That way, you will start paying them interest, instead of their competitor.
How Does a Transfer Work?
The process of transferring a balance is relatively straightforward. You simply tell your new credit card company how much you owe, and the account number for your existing credit card. The company then pays off the old account, and transfers the balance to your new card. The whole process usually takes a couple of weeks. The banks recommend that you make any minimum payments due during the transfer period, so that penalty charges don't accrue.
Why Transfer a Balance?
We know why the banks want you to transfer your balance, but why would you want to go to the trouble? One reason is convenience. If you have several cards with a balance, you may wish to consolidate them so you don't have to make several different payments every month. Another reason might be that the new card offers a grace period during which interest is not due. This gives you the opportunity to pay off outstanding debt without accruing interest, which allows you to pay down your debt faster.
Balance Transfer Fees
Fees add to the cost of transferring your balance, so you must assess these terms carefully. If a fee applies, is it a percentage of the total transfer amount, or a flat fee? Obviously, no transfer fee would be best. However, a flat fee of $25 is preferable to a 3-percent fee on a $10,000 balance, which would be $300. Next best would be a percentage with a cap (e.g., a maximum of $50). By paying 3 percent up front on the total balance, you are adding to your debt rather than reducing it, so you need to take this cost into consideration when calculating your payback.
Warning
Some credit card companies do not offer an introductory 0-percent interest rate on balance transfers. Instead, they offer it only on new purchases. You should also note what the interest rate will be after the grace period. If it's higher than you're currently paying, you may end up in a worse position. Before you transfer a credit card balance, make sure you have a realistic debt-payment plan that specifies how much you will pay each month and the source of the funds. Often, credit consolidation fails because consumers haven't changed their spending habits.
0 comments:
Post a Comment