Credit Card Loans

It's not uncommon for credit cardholders to receive balance transfer offers in the mail. During 2006 more than 9.2 billion credit card solicitations were mailed in the U.S., and many were balance transfer offers, according to direct mail monitor Mintel Comperemedia. For people who carry a lot of debt at high interest rates, balance transfers can be helpful. However, before filling in one of those special checks, consumers should carefully read and understand all the conditions that come with that offer.

Credit Card Interest Rates

Balance transfer offers for credit cards often include special checks that have a zero or low interest rate. Some of those transfers offer an introductory rate that rises after several months, while others have a fixed interest rate until the balance transfer is paid off. Before signing anything borrowers should determine what the annual percentage rate (APR) will be after the introductory period. That's what the yearly interest rate will be if they carry over a balance, take a cash advance, or execute a balance transfer.

Watch Out for Fees

Using low interest rates can be a smart way to consolidate debt and lower monthly payments. However, consumers should realize that late payments can cause the interest rate to rise dramatically and they'll be hit with late fees too. It's crucial to look out for fees like annual "memberships," over-the-limit charges, and fees for each balance transfer (a percentage of the total or a flat fee). When consolidating several credit card loans, those fees could really add up for cardholders.

Not Everyone Qualifies

Even those who accept a balance transfer offer don't necessarily qualify for the low introductory rate. They may still be able to consolidate credit card loans through the offer, but it could be at a higher teaser rate and APR. The better the credit score, the more likely it is that cardholders get the low rate highlighted in the offer.

Be Responsible

When choosing to perform a balance transfer, cardholders must continue making monthly payments on all credit cards until they can verify that balance transfers have been completed. Regular on-time payments should continue even if the balance transfer takes longer than expected. It's also important that borrowers control their spending so as not to take on more debt. Some cardholders find it difficult to avoid the temptation of running up new debt and use the available credit on the cards from which the balances were transferred. Avoiding this is critical for long-term financial health.

One way to reduce this temptation after a balance transfer is to cancel the cards that now hold zero balances. When doing so, the cardholder should inform the issuer and follow their cancellation process. Do not give into the credit card representative’s appeals to maintain the card or their offers to change the rate and terms of the card. The next time you view your credit report, make sure the card does not still appear to be active.

One note of caution:

To maintain a good credit rating, it’s important that borrowers not exercise 100% of their available credit. Being “maxed out” has a negative effect on credit scores, and potential lenders can see that there is no additional credit available for emergency situations. If someone has $10,000 in available credit (through one or more credit cards) and currently carries an outstanding credit card balance of $9,920, this negatively impacts their credit score, which can, in some cases, even trigger a rate increase for existing credit cards (read the fine print carefully). Running over the limit is even worse for credit scores and should be avoided at all times.

So, if the balance transfer from the old card(s) to a new card places the new card at or near its credit limit, and no other cards are available, cardholders may not want to cancel all the other cards. Instead, it may be best to keep at least one other card open, just to maintain a credit cushion. If the available balance on that card is higher than it needs to be, a phone call to the issuer can have the credit limit reduced to an appropriate limit. Once this is done, to avoid the temptation to run up a balance on that card, cardholders should make this extra card less accessible (less convenient to pull out and use on an impulse buy). When a specific credit card is being held just to create a cushion of available credit, it does not need to be carried around every day. It may be best to place that card in a safety deposit box or someplace where the account can maintain an available balance without providing a daily temptation.

Used wisely, balance transfers can help cardholders pay off credit cards and give them some breathing room on interest payments. They may also confer perks such as no annual fees, rewards, or discounts on other services. Comparing different offers to get the best deal is a must, as is reading the fine print and avoiding unpleasant surprises down the road.


Mintel Comperemedia
Federal Reserve Board

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