What to Look Out for Before Transferring Balance to a Credit Card

A balance transfer offer from a credit card is a great way to either save some money or to make some money. For example if you have $1000 in debt with 18.99% APR interest rate, and you estimate that it will take you a year to pay off that debt, then over the course of the year you will pay $105.82 in interest (using this calculator). By transferring that balance to a credit card with a low rate (more details about this in a bit) say 3.99%, over the course of the same one year, you will end up paying only $21.74 in interest. In which case you save $84 in terms of interest paid. If your debt amount is higher, the savings can be higher as well.

If you are debt free and want to leverage the credit card offers, then you could accept a credit card offer with 0% APR and transfer the money to a high-yield online savings account and make some money. Last year, I made around $2,000 from credit card arbitrage, so this can be quite lucrative if you follow the rules of the game. Anyway, irrespective of whether you plan to pay off your debt or make money using credit card arbitrage, here are some things to look out for before jumping on that balance transfer offer.

What is the interest rate?
Obviously the first thing to look for is the interest rate. If your intention is to do credit card arbitrage, then you want a card that offers 0% APR. There is no argument about that. If on the other hand, you are looking to do a balance transfer to reduce the interest you are paying on your debt, then you must go for an offer that provides the lowest possible interest rate, even though it may not be zero. If you do not have any offers in the mail yet, you might be able to call one of the credit card companies for the cards you already own and request for an “introductory” low rate for transferring balances. Make sure that the credit card you are transferring balances to does not already have a balance since the payment you make each month will always apply to the balance with the lowest interest rate.

What is the balance transfer fee?
Most credit card companies today charge a balance transfer fee. In some cases they may waive the fee for the first balance transfer, which is great. More often than not though the fees are around 3% of the amount transferred with a maximum cap of ~$50 to $75. You need to watch out for these fees carefully since they can completely obliterate any benefits you were expecting from making the balance transfer. For example, if you plan on doing a credit card arbitrage, paying 3% in fees while earning 5% in interest may just not be worth it! If you are planning to pay off debt, if your original debt was at 18.99% APR, but the new offer is for 16.99% with a balance transfer fee of 3%, you may actually end up paying more! So, pay close attention to the balance transfer fees.

How long is the introductory rate valid?
Most introductory rates are valid from 3 months to 18 months. If it is 3 months, it is probably not worth it to pay the fees and transfer balance. The 18 month balance transfers are a very rare breed. 9 to 12 months is more of the norm. So if you have an offer in mail for a 3 – 6 month introductory period, I would suggest passing it up and continue to pay your balances on all your cards. Sooner or later, you will start to receive juicier offers with longer introductory period.

What is the interest rate after the introductory period runs out?
If you are looking for a credit card arbitrage, then this should not matter since you will either pay off the balance or roll over the amount when the introductory period ends. But if you are looking to use a balance transfer to pay off debt you need to pay particular attention to it. Again, let us use the same example as earlier – a debt of $1000 with 18.99% APR, but assume that it will take you 2 years to pay off that debt. Now with all numbers rounded up, you will end up paying around $209.69 in interest over the course of the two years (again, using this calculator). Now, suppose you transfer the balance to a card with 9.99% APR for 9 months and 26.99% APR after that. Also, let us assume that the balance transfer fee is 3%. In that case, over the course of 2 years you end up paying around $215 which is more than what you would pay without the balance transfer!

What is the minimum payment?
Ideally, it is better for your credit score if you can always pay a little more than the minimum payment. So, irrespective of whether it is a credit card arbitrage or whether you are paying off debt, you need to be able to make a little more than the minimum payment. In the worst case, even if you can't make additional payments, you should always make at least the minimum payment before the due date in order to ensure than you introductory rate stays valid. Different credit card companies charge have different percentages for calculating the minimum payment usually in the range of 2 – 4%. So if you are transferring the balance from a company that computed the minimum payment as 2% of the balance to a company that computes the minimum payment as 4% of the balance, your monthly required payment doubles. If you have a very tight budget, make sure you have taken this into consideration.

Is there any requirement to qualify for the introductory rate?
There have been some credit card companies that offer an exceptional low APR with low balance transfer fees for a long term etc, but they come with a trap. You are usually required to make at least one purchase (sometimes three) using that card each month. The catch here is that, purchases are charged a higher interest rate than the balance transfer, and any time you make a payment, it will apply first to the amount at lowest interest rate (in this case the balance transfer offer). The trap here is that, if you forget and make a large purchase, you will end up paying a huge amount of interest on that purchase. Or, if you forget to make any purchases, your introductory APR is no longer valid and your interest jumps up quite dramatically. I personally stay away from such trap cards, but know of several people who have played the arbitrage game with such cards for years. So, it is up to you to decide if this is a biggie or not.

What are the default policies?
There are two things you need to be aware of here – the default rate, and the universal default policy. Default rate is the rate that applies if you do not meet the conditions for the introductory offer (eg. missed making the minimum payment before the due date). Universal default policy means that the credit card company can jack up the rates, even if you missed a payment on some other credit card, by an entirely different company! If you are doing a credit card arbitrage, then hopefully you have the money tucked away in a safe online account with relatively easy access. In that case, the default rate does not matter so much, but you may still want to avoid a card with the universal default clause, if your credit card arbitrage involves more than one card. If you are paying back debt, then you should pick a card with the lowest default rate that does not have the universal default clause.

If used properly, balance transfers are a great way to save or make some money. But the credit card companies have devised a ton of traps to make sure they can stay in business. If you plan to use the balance transfers to get out of debt faster or to make some money via arbitrage, make sure you know all the terms and be prepared for gotchas. Watching out for the items on the list above should be your first step. But do not stop at that. Keep reading on this topic and be prepared for whatever the credit card companies throw at you next!

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