At first glance, it looks like a life saver for a credit card customer with a burdensome balance: a chance to move the debt to another card that charges little to no interest. But balance-transfer fees went up the past year, and other pitfalls await the unwary.
In promoting balance transfers, card companies tend to emphasize the no-interest or low-interest charged on transferred debt, typically for six months to a year. But there often is a separate “balance-transfer fee,” and a recent study by Pew Charitable Trusts found that banks had recently raised this fee to an average of 4%, from 3% in July of 2009. Some card issuers charge 5%, though credit unions kept the fee steady at 2.5% on average.
Banks have raised a variety of fees in the wake of the Credit Card Accountability, Responsibility and Disclosure Act passed in 2009. Some of the act’s provisions kicked in Aug. 22, and others had started earlier.
A balance transfer can make sense if the alternative is continuing to pay 15%, 18% or more with the old card. But it’s important to look at the big picture, and to shop around rather than just jump at the first unsolicited offer that arrives in the mail.In addition to researching the transfer fee, check how long the zero- or low-rate deal will last. Obviously, 12 months is better than six.
Also, find out how high the rate will be after the initial period. If it will be higher than your old card’s, then the transfer may not make sense unless you are sure you can pay your debt off, or at least reduce it substantially, before the rate jumps.
As a rule of thumb, a balance-transfer should be seen as an opportunity to clear debt faster, not a way to reduce interest charges over the long term. The less you have to pay in interest, the more you can pay on the debt itself.