In our first discussion of balance transfer Catch-22′s, we discussed how credit card companies can increase minimum monthly payments on consumers that utilize a high percentage of their available balance.  And, while having a higher monthly payment is no walk in the park, that fine print snag isn’t nearly as nasty as the one we are about to discuss.

You’ve probably received more than your fair share of balance transfer checks in the mail.  Usually, these “special offers” provide a 0% or low interest rate on balance transfers you make with the checks.  On the surface, this may seem like a great way to consolidate credit card debt and save money on interest.  However, these offers for low or interest free balance transfers are not benevolent gifts from your friendly credit card company.  They are among the nastiest tricks in the credit card book.

What makes balance transfer checks so malicious?  With the vast majority of credit cards, you will find a statement such as this:  all payments will be credited towards the balance with the lowest interest rate.  To demonstrate how this hurts your wallet, let me provide an example.

Let’s assume you currently have a balance of $2,000 being charged 12% interest and you use a balance transfer check to transfer $2,000 from another credit card at a 0% rate.  When you make your monthly payments, the portion of your credit card balance with a 0% rate will be paid down, while the portion of your balance with a 12% rate will continue to accrue interest.

If, for example, you pay off $2000 of your credit card debt in 6 months, you will end up accruing over $120 in interest on the $2000 balance not subject to a 0% APR, leaving you with a $2120 balance after you’ve repaid $2000.  That remaining balance will continue to accrue interest at the 12% rate until repaid.  And, if it takes a year to repay the first $2000 in debt, your interest expense will be over $250, leaving you with $2250 in debt at year’s end.

Now, it is important to point out a few additional issues.  First, we assumed that the balance transfer checks offered a 0% APR.  Many balance transfer checks that enter my shredder offer rates of 2.9% or higher.  Some even offer 5.9% rates and charge balance transfer fees!  Its not even worth doing the math on these offers, as they are truly atrocious.

Clearly, I am not a fan balance transfer checks.  And for good reason.  The issuers of these offers prey on consumers, essentially trapping them with a false promise of big savings.  Because the Catch-22 of these offers is so deeply buried in the fine print and credit card statements are often underscrutized, even the smartest consumers may fail to realize that they have been tricked by their credit card company.

Now that you’ve given me the chance to vent my anger, I’d like to show you how to save a few hundred dollars by transferring a $4000 balance to a new 0% APR balance transfer credit card.  For this example, we’ll continue to assume you have two credit cards with a total balance of $4000 being charged 12% interest.  If you applied for a new credit card with a 0% APR for a year on balance transfers, instead of racking up $125-$250 in interest on part of your balance, you would pay no interest at all. 

Your current credit card company doesn’t want you to do this.  They want you to owe them as much money as possible and charge you as much interest as they can get away with.  Fortunately, there are plenty of other credit card issuers willing to take your business.  If you have a Bank of America card, transfer your balance to Discover, Capital One, or Citibank.  Borrow their money at a 0% rate until it expires and, if possible, transfer what’s left to another company until you are free from credit card debt.

For additional information on balance transfer credit cards, you can compare current deals and apply online at Smart Balance Transfers.

Joseph Heller’s famous novel Catch-22 is a much easier read than the fine print of a credit card statement, though both the novel and the fine print share unfortunate similarities.  In this, the first of a series of articles aimed at helping consumers understand fine print, we’ll tackle an unpleasant surprise buried so deeply in the fine print, all but the most avid reader of credit card terms probably overlooks it.

Today’s Catch-22 revolves around minimum monthly credit card payments.  By law, all credit card companies are required to collect a minimum payment every month from cardholders.  In most cases, this amounts to about 2% of one’s total balance, or about $20 for every $1000 in debt.  However, credit card companies ultimately set these numbers and, when they’re lending you interest free money, they can increase these minimums.

Just how much your monthly minimum payment will be varies from lender to lender.  However, most credit card companies impose higher monthly payments when the total amount of a 0% APR balance transfer exceeds more than 90% of your available credit.  Discover, for example, requires a 4% monthly payment when 0% balance transfers comprise more than 90% of your credit limit.  Thus, for a person with $10,000 in credit card debt, the monthly minimum will rise from $200 to $400 if that balance exceeds 90% of total available credit.

Discover is one of the few credit card companies that clearly discloses the details of what triggers an increase in minimum monthly payments.  However most, if not all, major credit card companies have similar policies.  The key for consumers, especially those barely scraping together current payments, is to take preventive steps when applying for a balance transfer credit card. 

Here are a few helpful tips to avoid getting caught in this balance transfer Catch-22:

1.)  Apply online and wait:  It may be tempting to get the balance transfer started as soon as possible.  However, if you wait until your credit card arrives in the mail, you can inspect the fine print and make sure you do not get an increase in your monthly minimum payment by transferring less than the amount that triggers a higher monthly payment.

2.)  Apply for multiple credit cards that offer 0% balance transfers:  Individuals with large amounts of credit card debt may not get the credit limit they need to transfer all of their high rate balances with just one card, especially in today’s shaky economic environment.  Applying for multiple cards can increase the amount of available credit you have with a 0% APR.

3.)  Don’t turn your back on 0% balance transfers:  This article is about a fine print Catch-22 that is easy to get around.  Of course, the absolute easiest way around it is to keep paying absurd interest rates and not do a balance transfer at all.  Financially, this is not the right decision.  Over the course of a year, 0% balance transfers can save the average consumer well over $100 for every $1000 transferred.  If you are serious about paying down credit card debt, balance transfers are the place to start.

Final Thoughts:  Patience is a virtue.  Applying online for a credit card that offers 0% APR balance transfers will expedite the process of getting that card into your mailbox.  However, when that card, and its hefty disclosure booklet arrives, pour yourself a glass of wine, slip into a comfortable chair, and enjoy a modern literary classic-credit card fine print.  While it may not be as enjoyable a read as your favorite Hemingway novel, it could teach you a thing or two about the world even Papa Hemingway didn’t know about.

For information on current balance transfer offers, please consult the credit card comparison section of this website where you can learn more and apply online for a 0% balance transfer.

Sources: 

Office of the Comptroller of Currency

About.com

Office of Thrift Supervision

A month ago, the answer to this question was yes.  In the past two weeks, however, this answer has changed.  Recent data and visitor feedback suggests that people who opt to transfer balances online may decrease their odds of getting approved.  Additionally, with many credit card companies, there is a pretty large financial incentive to wait until your credit card arrives in the mail before transferring balances.

We’ll start with the monetary reason.  Most credit card companies are now offering a 0% APR on balance transfers for up to 1 year.  The key phrase here is, “up to.”  Applicants with excellent credit will receive a 0% APR for a full year in most instances.  However, these credit cards may approve an applicant, but only grant a 0% APR for as little as 3 months.

Now, if you were to transfer your balance online to one of these credit cards and only get a 0% APR for 6 months, you’ll not only be paying interest 6 months sooner than you expected, you’ll also be paying a 3% fee.  This combination can wipe out much of the savings 0% balance transfers provide.

To avoid a scenario such as this, consider applying online and then transferring your balance when your credit card arrives in the mail and you can review the full details of your offer.  No credit card company provides upfront information on interest rates, 0% terms, or credit limits until they have reviewed your application.  Thus, the best option for consumers is to play it safe and wait.  If you end up with a credit card that only offers a 0% APR for 3 or 6 months, apply for another card from a different company to see if you get a better offer.

The second issue that had popped up this month is lower approval rates on applications submitted by visitors of Smart Balance Transfers.  This has been particularly apparent with the Discover More Card, the most popular offer on the site and one of the few remaining credit cards that actually delivers on a 0% APR for a full year to approved applicants.

While we do not know the exact reasons for this decline, one possibility could be the reluctance of lenders to accept applicants who desire balance transfers.  However, by simply applying online and calling in to transfer your balance, you may improve your odds of getting approved.

The important thing, however, is to be extremely careful about transferring balances online to credit cards that offer a 0% APR on balance transfers for up to 1 year.  Its much better to find out that your interest rate only lasts 6 months before you’ve paid balance transfer fees than it is afterwards.

For additional information and to compare 0% APR balance transfers, please visit the main section of Smart Balance Transfers.

News of credit card companies slicing the credit limits on consumer and small business credit cards has been in the news for quite some time.  However, a report yesterday discussed on CNBC and noted in today’s Wall Street Journal, an astonishing 60% of credit card companies are slashing consumer credit lines as a result of the continuing credit crunch.

Cutting credit limits on consumers creates a number of problems beside the obvious.  Here, I’ll do my best to describe the complicated effects lowered credit limits can have on credit scores, and thus the availability and cost of credit for everyone.

Let’s begin with the obvious.  Having your credit limit reduces your ability to spend.  Also, many people who have their credit limits cut are often sent an ultimatum from their credit card company:  close your credit card account and keep your current interest rate or keep it open and we’ll raise your interest rate.

Many people opt to do the second, and consequently, their credit report shows that they are using all of their available credit.  Even if you just have your credit limit cut from, for example, $10,000 to $5,000, this can negatively impact your credit score.

In the first scenario, where your account is closed, your credit score may be adversely effected because it will appear that you are “maxed out”.  In the second scenario, where a credit limit is cut in half, a balance of $4000 would now mean you are using 80% of your available credit.  These factors are strongly considered in not only your credit score, but in the way your credit report is viewed.

Having less available credit lowers your credit score, sometimes dramatically.  This, in turn, will make it harder to get a new credit card, to refinance your current credit card debt, or qualify for a good mortgage or car loan rate. 

Unfortunately for consumers, this raises the cost of borrowing money across the board.  However, there are a few remedies that, if taken quickly, can help ease the pain and prevent issues.  First, if you have money available, pay down your reduced limit credit card so that the balance is less than 50%.  And, even if you can do that, get a new credit card before the credit bureaus update your score.  This tactic is especially useful for people who cannot pay down their debt levels below 50% of the available credit balance.

Another option is to try to get a 0% balance transfer.  This will not only reduce your current interest costs, it can help you pay down your debt faster and help your credit score.

The impact of credit limit decreases are clearly troublesome.  And the repercussions can raise the cost of borrowing money across the board.  In these tough times, securing a 0% interest rate is becoming difficult, and if you don’t have one now, its better to act sooner rather than later.

For more information on 0% credit cards, please see the appropriate section in the credit card comparison section of our website.