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.
"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!
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