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Transfer
Balance, Then Put That Card Down! The Balance
Transfer Catch That Can Cost You Plenty
One
of the best money savers for consumers in debt is the credit
card balance transfer offer -- a credit card company actively
recruits you to shift your debt from a high interest card to
a new card offering zero interest for 12 months or perhaps a
3.9% rate for the life of the balance transfer. These offers
are attractive and can be a very good deal, especially if no
balance transfer fees are attached. BUT, they're only a good
deal if you transfer your balance and then put the new card
away.
Here's
why. Most credit card issuers have clauses like this in their
credit card contracts:
"How We Apply Payments: We will apply your payment to pay
off lower-rate balances before paying off higher-rate balances."
Here's
an example to illustrate what that means:
Say
you transfer $4,000 onto a new credit card offering 0% interest
on that balance for 12 months. While the card has a 0% rate
on the balance transfer, it has a 14.24% interest rate for new
purchases. From the time you get this card until the transferred
balance is paid off, every payment you make will go toward paying
down the transferred balance--none of it will go toward new
card purchases. So, in this example, any new purchases would
incur a finance charge at the 14.24% rate.
Here's
how that can play out.
A cardholder transfers a $4,000 balance at 0%. Once she receives
the card, she charges $500 in new purchases. When the bill comes,
she pays $500--the same amount she made in new purchases. She
assumes there will be no finance charges because all that remains
is the $4,000 she transferred at 0%.
But
that's not how it works. The credit card company applies that
$500 payment to pay down the 0% portion of the balance, while
the $500 in new purchases is charged out at 14.24%.
Previously,
she had a $4,000 balance at 0%. After this, she still has a
$4,000 total balance, but now the split is $3,500 ($4,000 minus
the $500 payment) at 0%, and $500 at 14.24%. On the next month's
bill she'll find a finance charge of roughly $5.93--the interest
on the $500 in new purchases.
In
addition, from this point on, she'll get a finance charge on
that $500 every month until the complete balance is paid off,
including all the money she transferred from the other card.
And, unless she pays it all off, the previous month's finance
charges will accrue and interest will be charged on those as
well--in this example, next month she'll be paying a finance
charge on $505.93 instead of on just $500. For someone that
can't afford to pay off the transferred balance, a single purchase
on the new card leads to mounting finance charges each month.
A
caveat: some credit cards offer zero percent or very low rates
on new purchases in addition to the tempting balance transfer
offers. (See 0%
Introductory Offer Credit Cards for some of these.) In this
case, you can transfer your balance and makes new purchases
without worry -- except for the worry of how you'll pay off
those balances when the no-interest period ends.
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