So, how exactly do they work? Let’s say, hypothetically, I transfer a balance of $5,000. The initial fee is 3% of the balance transferred which would be $150 for the first 3 months. Does that mean my minimum payment those first 3 months would be the $150? There’s no interest charged to start.
It then becomes 5% of the balance transfer, would that be off the initial transfer, or what’s left of the balance after the initial months? Am I getting this, or am I completely missing something? This is assuming I don’t make any other purchases with the card those first few months.
You are going to owe the $150 no matter what. It will be added to the $5,000, so you now have a balance of $5150. Each month the credit card company is going to charge a minimum monthly charge. Credit card companies vary on how much. So if you have a promotional period with no interest it might be 1% of statement balance or $51.50 the first month and slightly less the 2nd month (since your balance is $51.50 lower). There will be lengthy statement of terms and conditions on how they calculate the minimum payment.
Of course after the promotional period is over the minimum is going to shoot way up if you still owe a lot of money because credit card companies charge horrible interest rates [25% a year for example].
Thank you, and I agree, the rates are outrageous.
You can use a calculator to help figure it out too: [YYYY] Balance Transfer Calculator: Calculate Balance Transfer Savings
The whole point of balance transfer is to get you indebted to a different company; their company. And the point of the fees is to prevent people in effect kiting credit cards by moving funds debt around costlessly.
There is nothing that is a good deal about them unless you’ve somehow managed to a) run up a large balance on an especially high-rate card and b) somehow have a large amount of unused balance on a low rate card.
Plenty of people have a). Plenty of people have b). Rather few have both at once.
This is why you want a promotional period of at least 12 months. That gives you time to hammer away at the balance. Also don’t continue to run up the balance with additional purchases. The best deals are 0% rates on a purchase not a transfer. But I’d rather pay a transfer fee than let a balance accrue cc interest charges.
If you’re part of that few, though, it can save you some money on interest rates? I knew a guy like that who had many cards, each with high purchase interest but low balance transfer fees. He’d buy new TVs and then cycle the purchase through the balance transfer cards, one at a time through each one’s promotional period, until it was fully paid off. With all the fees it probably added up to more like 5% or 6%, which is still less than the 25% or whatever he might otherwise have had to pay.
There’s entire subreddits and such dedicated to juggling cards like that. Presumably it works for some of them while others just lose control and get sucked into massive debt 
Definitely some stuff to think about here. I’m just tossing the idea around. I’m also considering only transferring a partial balance.
The calculator feature is helpful!
For what it’s worth, for the most part, the balance transfers just work the way you’d expect and there isn’t necessarily any hidden “catch”. It just moves debt from one company to another. The destination company still makes a little profit off you — 5% of your balance is still better than 0%. You’re essentially refinancing it. If the original card’s purchase APR is high enough, it can indeed be a net savings, sometimes quite a large one.
If this is something you need to do more often, though, consider other types of bank loans (usually with lower APR than credit cards), store-branded cards (often 0% interest over like 1-2 years if your credit is good enough), etc. Just don’t get sucked into the cycle and become reliant on debt, of course… (I made that mistake too many times to count).
There are many, many different ways these balance transfer come-ons are structured. But the underlying intent of every one of them is to let you take a short breather on paying the debt, followed by then paying all the debt and even more on top. They’ll lift a brick out of your pack for a month or three, then drop a stone basketball in there to replace the brick.
So if somebody has a real reason, not just foolish optimism, to believe that a short breather would be worth paying for, they can be helpful. But for most folks, it’s just a way to go deeper in debt.
Well, why is that? If you’re refinancing a debt from a 25% APR to a 3-6% balance transfer APR… you should end up with less overall debt over the same amount of time, especially if you can finish paying it off within the intro period.
Even if you can’t pay it off in that period, having a brief reprieve of 6-12 months with a lower APR is still a big chunk of savings than if you had to keep accruing interest at 25% APR over that same promo period.
For this to be true, wouldn’t the balance transfer APR have to end up worse than what the purchase card initially had? Even after the promo period, don’t they revert to just a “normal” APR that’s similar to the purchase APR?
I guess if you were going from a low % purchase APR → 0% promo balance transfer → high % balance transfer APR after the promo, then yeah, that wouldn’t be a smart move unless you were sure you could pay it off within the intro period.
But otherwise, isn’t it more like “they take a brick out of your pack for a few months, leave a few pebbles in there in exchange, and eventually put a slightly smaller brick back”. As long as the brick + pebbles doesn’t get heavier over time (and it shouldn’t, unless the post-promo balance transfer APR is higher than the initial purchase APR on the original card)… shouldn’t it be less overall debt?
What am I missing?
I think we’re probably talking about 2 or 3 very different “balance transfer” programs.
I agree that if you have a big balance on a high APR card that you can transfer (with a fee) to a lower APR card, that is almost certainly to your benefit. Whether the benefit is big enough to matter depends on the rest of one’s circumstances.
If the new card also has a forbearance period (0% (or trivial) APR if blah blah blah) that can be helpful if you can comply scrupulously with the blah blah blah. If you can’t / don’t though, that’s when they drop the bowling ball in your pack.
Those kinds of deals can be very attractive to the cash-strapped consumer. The issue comes in that unless they chance something about their income and expenses, they’ll be just as cash-strapped when the forbearance period comes to an end. And then the bank drops the bomb on their wallet.
The OP seemed at first to be asking about these things as theoretical constructs, more from a consumer interest or consumer protection POV.
In later post(s) it sounds like he’s considering using one himself. Which opens a lot of questions about personal circumstances, whys, traps, etc. Which they may not want to share, but which would be key to presenting advice tailored to their particular circumstances.
You are quite correct that if people use credit cards in a financially optimum way they can be financially better off taking advantage of various credit card gimmicks–but only a limited number of people do this.
But more often something like the following happens:
The guy has a $6,000 credit limit card with $5,000 charged. He adds a new $6,000 credit limit card and transfers that $5,000 to it. But what often happens is that he now charges another $5,000 to his first card and even adds some more to the slowly declining balance of the second–so just after the end of the promotional period he now owes $10,000 at 25% annual interest.
Yes, I’m thinking about it. I only use one card which is probably not very bright of me. So, I was thinking about transferring the balance or a partial balance on it because I saw an offer which is 0% APR for 21 months. Of course, it’s highway robbery after that.
Is that balance amount something you can reasonably expect to drive to zero in 21 months? Are you administratively organized or haphazard? Is your income secure? Are you able to resist the temptation to fill up another card if you get it?
Having a couple percent added to the balance transferred onto the new card from the git-go is a money saver versus what you’re paying on the old card to carry that balance at the typical full usurious rate while you whittle it down.
But, if all you’re doing is carrying that balance now, not whittling it at all, or at least not much, then you’re just arranging to stand under the bowling ball chute with your backpack wide open for them. Don’t do that.
If you transfer, you will save some cashflow on monthly interest expense no longer paid to the old card. BUT … If you’re thinking that that savings will be enough to fund whittling down the principal balance in a mere 21 months, you’re wrong. It’ll help, but it won’t help much.
ETA after the reply just below was posted …
We here don’t need you to answer those questions in public. But you sure need to know the answers truthfully in the privacy of your own head. And for both you and your SO / spouse / whatever if they’re part of your financial life.
Thank you!
Why is that not very bright?
Here’s a very recent thread on the whether / why / how of multiple CCs.
That might be useful reading.
Here was my strategy back in 2009 with Discover. Had a 0% credit card rate for about 10 years with an initial $20k balance transfer, while I was able to earn about an average 10% after tax on the $20k cash investee instead of paying off the debt.
I’ve read that it’s better to have at least 2 cards. I do not claim to know the logic behind it. I can only guess that it’s seen as a better way to build credit, or so someone doesn’t max out a card. That, of course, makes no sense because someone could max out 1, 2, or 10 cards for example.