Credit card balance transfer
This process is actively encouraged by almost all credit card issuers as a means to attract new customers. Such an arrangement is attractive to the consumer because the new bank or credit card issuer will offer incentives such as a low interest or interest-free period, loyalty points or some such other device or combination of incentives. It is also attractive to the credit card company which uses this process to gain that new customer, and of course detrimental to the prior credit card company.
An order of payments for every credit card specifies which balance(s) will be paid first. In nearly all cases payments apply to lowest-rate balances first - highest-rate last (however some countries, like Australia, requires that payments are applied to the highest-rate balances first). Any balance under a teaser rate or fixed rate will be paid off sooner than any purchases or cash advances, which usually have the highest Annual percentage rate (APR). By avoiding making purchases or taking cash advances altogether, the borrower can ensure they maintain the full benefits of the original balance transfer.
The process is extremely fast and can be concluded within a matter of hours in some cases. Automated services exist to help facilitate such balance transfers. Other similar services do exist, but they may not be free to use.
Decisions on whether or not a card holder decides to transfer one's credit card balance depends on a combination of three things:
Normal rate (Prime)
This is the normal interest rate on a credit card. The lower this rate, the better for the consumer (less cost of capital) and the worse for the credit card company (less profit). The transferred balance will be subject to same rate as the card's purchase (merchandise) rate. Occasionally the same terms will apply as to purchases that may be interest free until the payment date for the statement on which the transfer appears. More often such transferred balances move immediately to the full purchase rate. Credit card balance transfers involving transfer of funds from a high APR credit card or a store card (which often has high APR) to a low- or zero-APR credit card will result in a reduction in monthly outflows for the card holder.
A teaser rate is an especially low rate that a credit card company offers to new customers to entice them to transfer their balance. It is a lure for catching new customers. With an extra low initial rate, transferring customers have lower than normal interest which ultimately means lower initial monthly outflows of money to the credit card company. The 0% rate is the most common when a new credit card account is opened.
This teaser rate is temporary. The duration of teaser rates vary from (typically) 6 to 15 months, after which the remaining transferred balance is subject to purchase rate. Teaser rates in the UK can often be longer than in North America, with (typically) 6 to 35 months available for UK balance transfers. Failure to ensure the account is current (payments made on time) may result in the withdrawal of the offer rate. Customers should pay attention to the length of time of the opening offer, since once it is over there is a sudden increase in rates. This increase is the credit card company's method of making extra profits to make up for the losses of charging the lower introductory rate. Of course, this can be countered by switching to yet another credit card company.
Fixed Life of Loan rate offer: A low rate that is fixed until the transferred balance is paid in full. This type of offer is usually guaranteed only as long as the account is current (see Teaser rate). Whilst this allows the borrower to save interest on their existing debts without the need to initiate further balance transfers once a teaser rate offer expires, the fixed offer rate is higher than the limited duration teaser rate offer. (Typically, it may be between one-half and two-thirds of a fixed rate, fixed term personal loan)
A transaction fee is a commission earned by the credit card company earning one's business and is a direct transfer of money from the user to the credit card company. This varies from (typically) 1-5% of transferred debt - sometimes with a maximum capped amount, but otherwise an uncapped percentage.
Balance transfer arbitrage
Because transferring to new credit cards often results in lowered rates, one can repeatedly make use of this process to save quite a lot of money over the years. The idea is to switch to a new credit card the moment the previous one's teaser rate has expired. There is a caveat: the credit card contract may include a clause preventing the credit card holder from transferring the balance a second time within a certain period of time. There may also be ways of extending the teaser rate or at least preventing it from disappearing prematurely. This method is often advocated by personal finance self-help sources.
To deter this type of behavior, many credit card issuers have stopped offering no fee balance transfers. Additionally, under pressure from various Federal agencies, card issuers have raised minimum payment requirements to ensure cardholders actually pay off their balances. These changes have made it less attractive to carry debt, despite any promotional APR that may be included in the offers.
- E. Thomas Garman; Raymond Forgue (2009). Personal Finance. South-Western College Pub. p. 196. ISBN 978-1-4390-3902-1.
- Fowles, Deborah. "Your Monthly Credit Card Minimum Payments May Double". Financial Planning. About.com. Retrieved 22 March 2012.
Under pressure from the Office of the Comptroller of the Currency (which regulates national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit.