The Checkout

Borrowers Beware of Credit Card Offers

Before you sign up for that latest, greatest credit-card offer--you know, the one that promises a low- or no-interest rate on a balance transferred from an existing credit card--make sure you're aware of what you may be getting yourself into. A lot of fine print in the offer could make it unattractive. That's the advice of two credit-card experts who have been reviewing the latest solicitations flooding your mailboxes.

First, even if the offer is for low interest or zero percent interest on the transferred sum, nearly all have a fee for making the balance transfer. It's typically 3 percent of the transferred balance, says Curtis Arnold, founder of cardratings.com, which tracks credit-card offers. And typically, there's a minimum $5 fee as well as a maximum, ranging from $50 to $75. But lately, Arnold says, there have been offers that have no maximum fee. And that could mean BIG BUCKS for you. For example, if you're transferring a $10,000 balance, the 3 percent fee would amount to $300 if there's no maximum cap on what a card-issuer could charge.

What's particularly troubling, Arnold says, is that most consumers probably won't realize there's no maximum fee because it's completely absent in the fine print. Up to now, the balance-transfer fee listed in the terms and conditions usually notes a maximum, but in some of the latest offers, there's absolutely no mention of any maximum. And that could mean you may have to pay the entire 3 percent charge. Best advice: Call and ask about all balance-transfer fees, including maximums, before accepting any new card offer.

Justin McHenry, head of indexcreditcards.com, which also tracks credit-card offers, also points out that balance-transfer offers are good ONLY if you "transfer your balance and then put the new card away." Why? Because of the way credit-card issuers apply your monthly payments; the money goes to the lower-rate balances first, before the higher-rate ones.

Here's how McHenry explains it:

"Say you transfer $4,000 onto a new credit card offering 0% interest on that balance for 12 months. While the card has a 0% rate on the balance transfer, it has a 14.24% interest rate for new purchases. From the time you get this card until the transferred balance is paid off, every payment you make will go toward paying down the transferred balance--none of it will go toward new card purchases. So, in this example, any new purchases would incur a finance charge at the 14.24% rate.

Here's how that can play out. A cardholder transfers a $4,000 balance at 0%. Once she receives the card, she charges $500 in new purchases. When the bill comes, she pays $500--the same amount she made in new purchases. She assumes there will be no finance charges because all that remains is the $4,000 she transferred at 0%.

But that's not how it works. The credit card company applies that $500 payment to pay down the 0% portion of the balance, while the $500 in new purchases is charged out at 14.24%. "

There are some offers, McHenry says, that do offer zero percent or very low rates on new purchases as well as on the balance transfers. Those may be good deals.

Bottom line: Do your homework and always, borrower, beware!

By  |  July 26, 2006; 7:00 AM ET Credit Issues
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Comments

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Another thing to be wary of: credit card companies who promise to transfer a balance and then fail to do so. My husband and I got a new card a few months ago that offered 0 percent on balance transfers for the life of the transfer. We had just gotten married and wanted to consolidate our credit cards, plus we had no intention of using the credit card in the future. So we talked to the company, and they looked up our three existing cards and said there would be no problem with the transfer. I didn't think to get the name and ID number of the person we spoke with - BIG mistake. It wasn't until after the transfers occurred that we realized they had only performed two of them, not all three, and when we asked what happened, the new person we spoke with said that the third balance wasn't eligible and that there was no way anyone at their company would have told us otherwise.

We still got a good deal - the bulk of the balances were transferred, and 0 percent is a good rate. But we didn't have the option of shopping for a card that would consolidate everything, because MBNA lied to us about it.

Posted by: Ugh | July 26, 2006 10:08 AM

It's may be better to just throw those offers in the shredder. Continuously opening new accounts and transferring balances may have a more damaging affect on your credit rating than paying off the current credit card balance.

Posted by: AH | July 26, 2006 10:12 AM

I got ripped off by one of those offers. The transferred balance showed up on the next statement, the 3% fee showed up, and so did an interest charge. I had made absolutely no other purchases on this card, only the transfer.

I called the company and asked what the interest was for. They said it was on the 3% fee, and interest would continue to accrue as if it were a purchase. As soon as I got off the phone, I dipped into savings (Singletary would be so ashamed of me), paid the card off, and never did business with those con artists again.

Posted by: NAC | July 26, 2006 10:34 AM

It would be helpful if the OCC would revisit the legal disclosure that is required of the credit card lenders. This is not protecting the consumer, it is enabling issuers the ability to bury negative terms and conditions with compicated legalese, while using small type in voluminous materials.

The more that is required of the banks in the name of disclosure, the greater the ability they have to confuse the consumer.

Posted by: Info | July 26, 2006 10:47 AM

NAC,

They charged you interest on the 3% fee for the balance transfer? That had never occurred to me & I've never heard that mentioned before.

I've never actually transferred a balance personally that required the 3% fee, so I always assumed the 3% got lumped in with the transferred balance at the 0% interest rate.

Anyone else have a similar experience?

Justin McHenry
IndexCreditCards.com

Posted by: Justin McHenry | July 26, 2006 1:11 PM

Mr. McHenry,

Yes, they absolutely did. I still have the statement. When I called, they outright said that the 3% fee was considered to be like a purchase, subject to interest.

I have since looked for that condition in the fine print of other offers. I arguably, maybe, possibly have found it once since then. But that ripoff experience was the last time I ever did or will do a balance transfer.

I'm with AH -- they all go in the shredder from now on.

Posted by: NAC | July 26, 2006 1:50 PM

Justin--

Yes, I've done "bargain" balance transfers before where the 3 percent fee winds up listed under regular purchases rather than the special-offer rate. The monthly interest that is charged on the balance transfer is often listed separately as a regular purchase subject to the standard (and higher than the special offer's) APR. Since the APR on regular purchases can be 10 points or more higher than the "bargain" balance-transfer APR, these hidden costs can add up fast, especially since a customer's monthly payments are applied to the lower-rate special-offer balance first.

Posted by: KR20852 | July 26, 2006 2:33 PM

We had the misfortune of believing an offer by one of our credit card companies. They sent us a magic check that would have only a 2.5% interest rate. So we used it to pay off a car. What they didn't tell us was that our monthly payments (we paid our balance in full each month) would go to our magic check payment allowing our regular balance to accumulate a lovely 15% in interest. Oh no, I don't think so. Luckily the bank valued our continued use of their services (also have insurance, etc. through them) so they "fixed" the problem by separating the two accounts completely. The only remaining problem is that this teasing apart of the accounts resulted in a much lower open balance on our credit card. Huh. Still haven't figured that one out.

Posted by: Groan | July 26, 2006 3:18 PM

KR20852,

May I ask the name of the institution who pulled that stunt with you? The one who pulled it with me was Providian, who has since become Washington Mutual.

Posted by: NAC | July 26, 2006 3:30 PM

Also beware of zero interest/ zero payment offers. Paypal charged me a $1.00 finance charge, even though I had paid off my nonpromotional items within the grace period, and the promotional items were not due to be paid until July. When I confronted Paypal I was given a lecture on how the money market works by some punctilious supervisor. Lesson: Caveat Emptor!

Posted by: JG | July 28, 2006 1:14 AM

A counselor I work with said one can find a zero percent interest for life of balance transfer credit card. I haven't found anything like that. Has anyone else?

Posted by: RAS81 | July 29, 2006 3:33 AM

Yes, there are 0% for life offers out there. I've gotten a couple from Discover, mailed specifically to me. The deal is that it's usually a fairly small balance transfer amount, requires a couple of transactions a month, and the new transactions start accruing interest immediately. The secret here is small transactions - we add a couple of very small gas purchases every month (5 to 10 cents). It takes a long time for interest to accrue on this, so it's a good deal. I think these types of things are a wager the credit card company makes with you: They're betting that you'll forget to do the transactions, won't do small transactions, or will miss a payment. I'm betting that I'll get the transactions done, they'll be small, and I won't miss a payment. In some cases, in can be worth the gamble.

Posted by: webmom | August 2, 2006 1:59 PM

We decided to consolidate all bills and go through our bank(Teachers credit union, FirstMark). We explained how we had a loan through them(Our loan through them was $5000.)but wanted to combine our credit cards with the loan and asked for $13000. to cover all balances. They aproved us for 10,000. and then we found out after the credit aproval we'd have to minus the loan through them which woould mean we wouldn't be able to fit all our balance transfer's which would defeat the purpose of consolidating (total of credit cards with balance $801,2.93;not including loan thru our bank).Since we already ran the credit report, it won't cancel till 30 days from now. We're in a bind now! They should have explained this to us before running the credit check. Are bills are getting worse as we speak... I think this will affect us if we try to go through another back ground, consolidating option. They may aprove us for less now.

Posted by: Vonnie | September 21, 2006 2:19 AM

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