Friday, July 18, 2008

Know the Rules of the Game When Doing a Credit Card Balance Transfer

It often makes sense to transfer a balance from one card to another -- especially when the "another" is one of those 0% interest deals that's good for a year. But before you do that balance transfer, it pays to know the rules of the game first.

There are several pitfalls awaiting our unsuspecting credit card customer, so let's start from the top. First, that 0% offer is only good as long as you don't go over the limit and are never late on the bill. If you breach either of those agreements, you can kiss your 0% offer goodbye.

Indeed, not only will you lose the 0% deal, the credit card company (we'll use Bank of America for illustrative purposes) will assess the standard annual percentage rate on your balance. Miss a payment or go over your limit twice on any two occasions within twelve consecutive months, and Bank of America could hammer you with the default rate. Ouch. Instead of enjoying 0% for 12 months, you could be saddled with a hefty balance that's accruing at 29.99%. In other words, don't be late and don't go over your limit.

See Bank of America's boilerplate warnings here:

And the default rate here:

See Bank of America's standard boilerplate language regarding the penalty that faces someone who doesn't fulfill his or her balance transfer obligation here:

In addition to the warning about going over your limit or missing payments, notice the language about applying payments to lower interest rate balances first. This is one of the biggest mistakes that I see people make with balance transfers. What many people don't realize is that higher interest balances get trapped by 0% balance transfers. It can happen two different ways.

You've got a $12,000 balance at Chase -- on a card that is nailing you for 20.9% a year. Eager to chip away at that balance, you decide to take advantage of your Bank of America card, which is now offering a sweet 0% deal (Bank of America made you aware of the deal through your email account). Your Bank of America card has a $22,000 limit and it currently has a balance of $4,700 on it. That $4,700 balance has an interest rate of 13.9%. You decide to move the entire $12,000 balance away from Chase and over to Bank of America. This brings your entire balance to $16,700. What happens from here is that you pay down the balance every month -- and your payments are earmarked for the lowest-interest debt first. Thus, your $500 payment is applied to the $12,000 balance first (the 0% debt) and does nothing for the $4,700 that's now trapped and accruing interest at 13.9%. Until you get that $12,000 at 0% paid off, that $4,700 will continue to amass interest.

The second -- and most common -- way to trap a balance is to make purchases after you've done a balance transfer to a card. Suppose that we take $12,000 from one card (where the interest is sky high) and move it to a brand new card that is offering 0% for a year. That new card, along with the new balance transfer, would be well situated if you did nothing with that card from then on. You'd accrue no interest on the balance for a year. Perfect.

Often, however, that's not what happens. Instead, borrowers do the balance transfer and then start using the card for everyday purchases (at whatever rate that happens to be). If you're not getting 0% on everyday purchases, you've just started trapping those purchase balances. Remember, payments go to lower interest-rate balances first. Imagine putting $8,000 in purchases on a card that already has a $12,000 balance at 0%. You can see the problem. The $8,000 balance, which could be getting hammered with a high interest rate, is now trapped until you get that original $12,000 (at 0%) balance paid off.

To avoid these errors, here's what you should do with your 0% balance transfer cards. Never miss a payment (no brainer), never go over the limit (also a no brainer), and don't use the card. That's right. Simply put the card away in a safe place until you've paid off the balance. (Disregard this advice if your everyday purchases are also at 0%.)

By the way, while we're talking about balance transfers, always remember that fees can be waived. If you're doing a balance transfer and the fee is 3% (with no maximum) feel free to call and see if the card company will put a cap on the fee. If there is a fee of $75 (as there is with Merrill Lynch) call and see if the company will waive the fee altogether. You'd be surprised by what you can get by simply asking for it. These companies want your business and they're willing to eat the fees in some cases.

Using credit cards should not be difficult. Read the rule book before taking the field, and things should be A-OK.


  1. RussJuly 18, 2008 at 12:13:00 PM EDT

    Good advice. However in the example you gave: transfering a $12k balance at 20.9% (to get a 0% one year deal) that would trap a $4,700 balance at 13.9% would still make sense. To make the math simple, if you planned on paying off both cards in one year, you would save a little over $1500 dollars by using the transfer. So, you have to play with the numbers.

  2. Credit MattersJuly 18, 2008 at 12:28:00 PM EDT

    Absolutely true. And thanks for pointing that out. I should have been a little more precise when I used those numbers. I should have used a higher Bank of America rate in my example (to drive my point home). The fact of the matter is that people need to pencil the math out.

    Thanks for the comment, Russ.

  3. EmanuelJuly 21, 2008 at 9:33:00 PM EDT

    What about this scenario where you have a balance on one card which is offering 0% transfers

    1) Transfer the outstanding balance to another card. Doesn't matter what the APR is, it won't be there long.

    2) Wait for card to show 0 balance online

    3) Transfer both balances to the card now at 0%?

  4. Credit MattersJuly 22, 2008 at 1:11:00 AM EDT

    Emanuel, it could work. I understand exactly what you're talking about. Here's the only potential problem: let's say that you move the balance initially from Citibank and over to Bank of America. Then you move the balance back over to Citibank (which is where part of the balance originally started). As we all know, we can't move balances from Citi products to another Citi product. By using your method, we'd be getting around that. But, what if Citi is keeping track of the trail?

    Clearly, Citi will know that you originally moved the money to XYZ account at B of A. They'll also realize that the balance transfer that's coming back is coming from that same XYZ account at B of A. I think that's the only potential problem with your plan. Citi could deny the balance transfer.

    That said, it's probably worth the risk if the balance transfer fees are kept in check (perhaps you've negotiated a better transfer fee or you've got a cap on the fee).

    It might work, Emanuel.

    Thanks for the comment.

  5. AnonymousJuly 26, 2008 at 6:52:00 PM EDT

    When you talk about waiving a BT fee, should you call first before transferring ans say... I am thinking about transferring a balance, but I don't like the $75 fee blah blah? And then they waive it while you do the BT on the phone with them? Or, is it better to do the BT first, and once the fee posts, ask for the fee to be refunded? I am not clear on the process of this. Thanks.

  6. Credit MattersJuly 26, 2008 at 7:30:00 PM EDT

    Anon, you should call the company and ask about a fee waiver (or reduction) BEFORE you do the balance transfer.

    If they agree to the waiver or reduction, do the balance transfer over the phone -- while you have the person on the line.

    There is no guarantee that you will get a waiver, but I always call and check. It can't hurt; it can only help.

    Best of luck.

  7. HkbushidoOctober 15, 2008 at 12:56:00 PM EDT

    called penfed about a BT. The rep was very helpful and suggested if I wanted to do a BT, to put it on another card. I don't want to allocate from the CC I already have to a new card.

    Can an underwriter tell me how much more credit I qualify for without having to apply for another card, a.k.a put in an application?

    The other thing is if I want to do a BT of 10k and they give me a new card with 10k, then I'll be shooting myself in the foot with 100% utility. Realistically I can't get a 100k limit card to keep utility below 10%.

    Did I miss something or is doing a BT a Fico killer if you don't have high limits to keep utility down?

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