-
Overview
Years ago, credit card companies inundated consumers who had good credit with zero percent balance transfer APR offers. They certainly didn't do this as a favor to consumers. They did this because they wanted to pull in new customers who would not only transfer balances to the new card, but also start using the card for new purchases. Today, Americans are drowning in credit card debt because many didn't fully understand the repercussions of using these attractive low APR balance transfers.
Identification
Balance transfers are a way to move money from one credit card to another. Many credit card companies allow you to do a balance transfer over the phone or on the Internet; they simply take information about the bank account or credit card that you want transfer money from, pay them on your behalf, and then charge your account for the amount transferred. You pay interest until the balance is completely paid off.
APR stands for annual percentage rate. This is the amount of total interest you will pay on an annual basis. So in short, your balance transfer APR will be the amount of interest that you pay yearly on the amount of the balance you transferred.
How Do Credit Card Companies Determine APR?
Most credit card companies calculate your APR rate based on the prime rate, an economic index used by banks. The prime rate is basically the rate that banks charge their best commercial customers. Since the average individual comes with more financial risk, they are charged an additional amount on top of that prime rate, usually about three or four percent more. Some credit card companies offer you a special fixed balance transfer APR that is lower than what you are paying on your other cards to attract your business. These creditors would prefer that you pay them the interest associated with the balance instead of paying another credit card company.
APR Changes
When credit card companies offer a low APR balance transfer, it usually is for a short period of time. Low balance transfer APRs will last for about three months to a year before reverting to the standard purchase rate for the card, or even higher depending on the agreement. Before taking a balance transfer offer, it's important to read the fine print of your credit card agreement to find out what the rate will change to when the offer expires. Customers who default on their credit card payments usually lose those low rate offers and end up paying very high rates on their balance transfers; as much as 25% in some cases.
Is There a Difference Between an APR and an Interest Rate?
A balance transfer APR can be slightly different from the stated interest rate. That is because the APR includes all finance charges that are associated with the balance transfer. For example, you may be charged an additional fee from your credit card company to complete the balance transfer, usually about 3% of the amount you took out.
Important Considerations
Your monthly payment is not applied equally to your transferred balances and your purchase balances. Instead, credit card companies apply your entire monthly payment to the lowest APR balance first until that amount is paid off. If you have a balance transfer APR of $5,000 at 4.99% and a purchase balance of $1,000 at 17.99%, that purchase balance will grow continually and build in interest until your transfer balance is finally at zero. Depending on how long it takes you to pay off that $5,000 balance transfer, you could end up with a fresh new balance of $5,000 or more to start paying off yet again! This maximizes the interest that the credit card company can collect from you over time and prolongs the length of the debt.
