Balance Transfer Special Offers

Until Paid in Full … hmmm …
You may receive special balance transfer type checks from your credit card company. Unlike normal credit card checks, these come with an extremely low interest rate good until the associated balance is paid in full! Also, the check usage/balance transfer fees may be reduced or waived altogether. An example rate is 2.99%, which is lower than you can probably get on a home equity loan!

You say to your self: “There must be a catch… isn’t there?” Well, yes, there are in fact several catches. First there is the normal catch, that you must be eligible for such a rate, and a subsequent credit check may bounce your rate up high. You can head off this potential problem by contacting the company ahead of time via phone. They should be able to confirm whether or not you are currently eligible for the offer. Second, if you ever default on your card per the card agreement, all of your special rates may evaporate.

The biggest problem, however, is the issue of how subsequent payments are applied to your outstanding balance. A typical clause regarding distribution of your payments is as follows: “We will allocate your payments and credits to pay off balances at low periodic rates before paying off balances at higher periodic rates.” Hence all of your normal payments will be applied to the special purchase or balance transfer, until it is paid off.

For example, let us say that you use one of your special credit card checks to pay off a home equity loan balance of $5,000. You also use the card for normal day-to-day expenses and average about $500 per month on such uses. Per my budgeting guidelines, you pay off this balance on a monthly basis. However, for the home equity loan payout you plan to take two to three years to pay it off considering the low interest rate of say 2.99% as offered. The statement received after the first month could be as follows:

· Statement charges: $500.00 for various purchases.
· Special Check used for Home Equity Loan balance: $5000.00 say with 15 days left in your billing period. Hence a finance charge of $6.14 to cover these remaining days will be added on even if your previous balance was paid in full.
· Let’s say you plan on paying $200 on the Home Equity Loan balance per month until the balance is paid. You also are going to pay your $500 in normal expenditures in full. Then your payment would be $700 in total. However, your payment will all be applied to the transfer-balance because it has the lowest APR!

Consider that your normal APR is 12.99%, and you put another $550 in normal expenses on your credit card the next month. Then the following will happen on the next statement:

· Your payment of $700 from the previous statement will be applied all to your Home Equity Loan balance reducing it to $4306.14 (remember that it already had $6.14 in finance charges applied). Next months finance charge (2.99%) would apply for the entire month (30 days) and would be $10.58.
· Your normal expenses balance of $500 would still be outstanding for the whole month and incur a finance charge (at 12.99%) of $5.34.
· Your new charges of $550 say have an average duration of 15 days and would be subject to an immediate finance charge since this is no longer a zero-balance credit card. The finance charge would be $2.94.
· Your total statement balance for the second month would then be:
o Special-transfer remaining balance: $4306.14
o Special-transfer balance new month interest: $10.58
o Prior month expenses: $500.00
o Current interest for prior month expenses: $5.34
o Current month expenses: $550.00
o Current month interest: $2.94
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Total Transfer/expenses: $5356.14
Total current finance charges:$ 18.86
---------------------------------------------------------------
Total Balance: $5375.00

The above balance includes $18.86 in finance charges. If you had not used the check to pay off the Home Equity Loan balance, then you would have had no finance charges on your credit card since you pay it off each month. Let’s say that your Home Equity Line has a current rate of 4.00%; then you would have paid $16.44 interest on your $5,000 balance. Hence, even though the special balance transfer of 2.99% is significantly lower than the Home Equity Line rate of 4.00%, its use would actually cost your more in finance charges ($18.86 on the credit card vs. $16.44 on the Home Equity Line). Plus the finance charges on the credit card are not tax deductible. This situation is caused by mixing normal card expenses with the special balance transfer amount.

The only way to use this type of offer effectively would be to isolate the associated credit card to only the special checks i.e. not to use the credit card for any other purpose. In this way, only the balance associated with the special check(s) would be involved and thus only the special low interest rate. If you only have this one credit card and need to continue using it for normal expenditures, then you should simply tear up these special checks and not transfer any balances.

Note, even if you can make good use of the offer, you may not qualify! The company may conduct a special credit review once you attempt to use one of the checks. If you have developed some issues with one of your other creditors then you may be disqualified. The disqualification would mean that you would be subject to the standard rate for the given transfers instead of the promo
tional rate! Such an event could put you in a worst situation i.e. paying a higher interest rate plus the added transfer fees.

Also note: even under the best of circumstances, if you transfer balances including items that you have not received yet or are in the process of attempting to settle some type of dispute, you may forfeit your rights after the balances have been transferred.

Still more to come regarding credit card offers ...