Balance Transfer Question

Invisible

I was talking to a friend today and he's convinced there has to be a catch or something with the balance transfer option.

According to the information he showed me, the balance transfer comes at 4% or $5 (whichever is greater) but offers no interest for 6 months. My argument is that if he can't pay off the balance before his bill is due, then he should take advantage of the transfer option because 4%<15%.

Is there some other catch maybe I'm missing? Any reputable websites that I can show him would help as well.

MrOletta

Wait, what? They're going to charge him a 4% fee of the amount he transferred? If so, then what is the interest rate after 6 months?

MichaelLC

Generally that's about right.

The catch is that often if you don't have it completely paid off, the interest may 'back date' all the way to the beginning of those 6 months. So if you transfer the amount and pay it all off without adding anything else, it can be a better 'deal'.
Little things like making sure you pay exactly on time, and often can only pay once per month are other possible gotchas.

benholio

Don't use the card for anything else until the balance transfer is totally paid off. There is usually a clause in the card user agreement that states all payments will be applied to balance transfers first and purchases last. So while you are paying off the balance transfer at a low interest rate, your purchase balance will keep accruing interest.

Invisible

The interest on the card after that time is around the same as the old card. The other card hasn't been used at all and he just had a major expense with his car.

I was looking over it for him, but he's just one of those people that no matter how you explain it believes there's something more to it. The pay off balance transfer first then other purchases make sense, and would be a problem if he had any plans to put more on it, but he doesn't.

It was just very frustrating. You asked me, I'm just telling you what the info on the contracts state. Just thought I'd ask here and see if maybe I was missing some huge point. Sure credit card companies tend to be 'scammy' but as far as I could tell there wasn't anything hidden, really it was just the 4%/$5 fee that was hidden in the fine print.

He can pay it off in 3 months no problem, just seems like it would be better for him to pay down an initial amount on the first card with no interest, transfer the remaining balance to the second card and take a 4% hit rather than two 15% hits.

Thundyrkatz

Keep in mind that the 4% is an upfront fee and the 15% is likely his APR.

1,000 @ 4% will cost him $40 right up front

1,000 @ 15% APR will cost him 11.71 per month

bankrate.com has some cool stuff on it, here is a CC Balance transfer calculator tool

kilroydos

As an added note, banks offer great rates on these to drive your business to them, so there isn't always a catch or back-pay of interest if not paid off in full during the time period. Just read the terms and look at any potential penalties or fees and factor those in before commencing and you'll be fine.

illig

Usually you can find a free balance transfer offer. So to me, the catch is that you have to pay 4% for this one.

bowen

Any idea on what this is ultimately for?

I mean it may be a good idea if he's got like a $300 tv he wants to pay off in 5 months or something.

It may not be a good idea if he has a $5000 card balance he wants to transfer.

Whacktose

illig wrote: »

Usually you can find a free balance transfer offer. So to me, the catch is that you have to pay 4% for this one.

Maybe I'm missing something, but I have never seen this, and certainly not since 2009. 0% APR for a period of time is generally the promotion, but I have never seen an offer without a transfer fee.

Djeet

bowen wrote: »

Any idea on what this is ultimately for?

I mean it may be a good idea if he's got like a $300 tv he wants to pay off in 5 months or something.

It may not be a good idea if he has a $5000 card balance he wants to transfer.

It would be much more "worth it" to juggle credit for a $5K balance over a $300 balance, so long as he's enough free cash flow and discipline to pay it down before he gets hit with interest expenses.

The real concern here is to fall into the trap of thinking additional credit means he has additional disposable wealth/income. I know a LOT of people who thought they were being savvy by juggling balances amongst teaser rate revolving credit lines just to end up maxing out 4-5 cards and then are truly fucked; this is where people with $30K jobs end up with $50K debt at 20%+.

Also, opening up and maxing out a new $5K revolving line of credit it going to be at least a short term credit score hit (if he's concerned about that).

bowen

This is true, but most of those introduction rates are for a year tops. That's a hell of a discipline to be able to drop $500 a month on something like that, which is why I was wondering. He misses a month or doesn't pay it off at the end of the term, then he owes probably a retroactive APR value.