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Overview
What is a Balance Transfer Rate?Credit cards compete just like any other business, and part of that competition is stealing business from competitors. One of the ways they do this is by offering advantageous balance transfer rates, encouraging borrowers to move their debt balance from other cards onto their card. Sometimes the balance transfer is a sound money management practice, but that depends on the terms and the math.
Balance Transfers
Balance transfers are the act of moving the account balance of one credit card to another. These typically involve three specific terms for the transfer: the offer's rate, the offer's duration and the transaction fee. The transaction fee is a fee charged for the transfer service, usually expressed in terms of a flat fee, or a percentage of the amount moved, or the whichever of those turns out to be the lowest/highest fee.
The Interest Rate
Offers of this type come with a special rate, which is below (sometimes substantially) below the standard interest rate charged for that credit card. The money moved accumulates interest at the new, special rate, rather than the standard rate charged by the card. New purchases made on the card will be charged interest at the standard rate, not the special transfer rate, and the terms are usually structured so that the principal of the balance transfer is paid off first, thus leaving the new balance with its higher rate untouched and accumulating interest longer.
Offer Duration
The other main consideration for Balance Transfer Offers is the duration of the offer: how long does it last. There are short-term, teaser rate offers; mid-term offers; and Life of Loan offers. The teaser rate is designed to be a short-term inducement, switching to the standard interest rate of the credit card in short order. Periods of 6 to15 months fall into this category. A Life of Loan rate is permanent, so long as the borrower remains a customer in good standing. A mid-term rate is anything in between, with durations of 2 or 3 years being not uncommon.
Warning
Like the standard rate of a credit card, maintenance of a special balance transfer rate requires a customer to remain in good standing. Missing a payment will at least result in the entire balance being consolidated under the standard rate of the credit card, and maybe under a new and higher standard rate. However, it is worth calling the credit card company to negotiate over that. They offered you the balance transfer special to attract your business in the first place, so they usually realize being inflexible will cause you to move your balance to a competitor.
Expert Insight
Balance transfers can be a useful means of consolidating and paying down credit cards, as some offer terms that are better than personal or consolidation loans. However, be sure to do the math before using them for this purpose. Moving a $5000 balance under a 2% transfer fee will add $100 to the principal, so that needs to be included in your repayment plan. Form a repayment plan within the set terms of the transfer, and stick to it.
Using balance transfers as a means of opening a new credit card account and freeing up further credit, on the other hand, is a terrible idea. This is often phrased as using one credit card to pay off another.
