Balance Transfer Considerations
Balance transfer considerations may have consequences that are not immediately apparent on the surface. Why should you not trade in a high interest balance for a fixed period of interest free time on a new account? Let us look under the hood at some balance transfer considerations that are not well understood.
Balance Transfer Considerations: 3% Fee
Most balance transfers charge a fee amounting to 3 percent of the balance to be transferred. Some balance transfer fees are as high as 5%. To transfer $5,000.00 at 3% costs $150.00. This is a one time fee. Although it cuts into the profitability it is worth it…especially if the interest free period is 18 months. Even at 12 or 9 months duration interest free the 3 percent fee is a worthwhile investment.
One deal currently being offered gives the consumer the choice between 12 months interest free after paying the 3 percent transfer fee or 18 months without the transfer fee but with the balance paying 5.99% interest. Either way can be a good deal if the consumer knows all of the other details that may influence his decision.
High Credit Card Balances
High credit card balances in relation to the limits on the credit cards are the second most important component of your credit score. The debt to available credit ratio of your revolving credit is second only to timely payments in credit scoring. Those high balances with their high interest are handicapping your credit score to a great extent. The lowered credit score becomes a hindrance to a high credit limit on the interest free new card or cards you are applying for. The more you need the relief from the high credit card compounded interest that is weighing you down the less that relief is available to you. This is a “Catch 22” rarely mentioned by those who claim to be credit experts.
New Account Lowers Average Age of Accounts
If you do open a new credit card account for balance transfer considerations that new account will have the negative effect of lowering your average age of accounts. It also creates an inquiry at one or more credit reporting agencies.
On the plus side the additional available credit will increase your aggregate debt to available credit ratio. It is hard to give an exact formula as to the net result of all these factors combined since there are so many different factors involved in each individual case. Credit scores are compiled from a lot of moving parts.
Balance Transfer Considerations to Existing Credit Card
Another very important consideration that is neither well understood by consumers or properly explained by lenders is the way future payments will be applied after a balance transfer to an existing account with a balance. Consider an account with a $10,000.00 limit and a $5,000.00 balance. Now the consumer transfers $4,000.00 from a different high interest account to that account. Yes the $4,000.00 is interest free for the 12-18 months usually promised. 79% of those surveyed thought that future payments were applied to the interest charging account first. Many thought future payments would be applied proportionally in a fair way with some of it going to the interest charging portion and some of it going to the interest free portion on a percentage basis. Here’s what really happens:
Payments Applied First to Interest Free Balance
When the card holder makes his next payment that payment in most cases will first be applied to that $4,000.00 portion of the total which is interest free. Read the fine print carefully on this. If you don’t fully understand how this process will work call customer service and ask.
This unfair allocation of payments in most cases will continue until the interest free portion of the balance is paid in full. All that time the original $5,000.00 balance has been accruing interest at the rate it was charging from the beginning! Show me the savings here.
After weighing all these factors a card balance transfer still may be worthwhile to get some breathing room on all that high credit card interest that has been weighing you down. Check out the interest rate you will be paying when the interest free period expires as well. This interest rate may change for the better if your credit score has gone up when interest charging time rolls around. Don’t be afraid to ask. Weigh these factors carefully and you will make the right decision for yourself with your own unique set of circumstances.