Editor’s Note:  This post, which went live in December of 2008, is getting a bit dated.  It deals with the original proposals and is, in essence, an historical document detailing the original plans for new credit card laws.  For more relevant (and recent) news on the new credit cards laws, please see New Credit Card Laws and Interest Rate Increases, a recent post dealing with the new laws set to come into effect February 22nd of this year. Continue Reading »

Those balance transfer checks that continue to flood our mailboxes have been touched upon a number of times in our Catch-22 series, and a recent check that arrived in my mail inspired me to bring up this subject once again.

The offer I received offered a “low balance transfer APR” so I could “save time by consolidating bills” and “save money on high interest balances.”  All of these features seem appealing.  Why not save time and money?  And then I looked at the terms.

First, the “low rate” was 3.99% for 15 months and there was a 3% balance transfer fee with the check.  That would effectively put my first year interest rate at close to 7%.  Sure, this would be less than the average credit card rate, but a lot higher than 0%.

The second catch was that these “time and money saving” balance transfer checks were promoted as ideal to use just like cash.  For an astronomical fee!  The balance transfer checks were also cash advance checks, which immediately were subject to a 24.99% interest rate.  And a 3% fee.  Even the mob would find these rates unfair.

While looking over this offer, I realized that the purveyors of balance transfer checks are looking to prey on basic human desires.  Many people who receive these offers do stand to save money and time (unless, of course, they use the cash advance feature).  The issue I have, however, is that these offers don’t provide consumers with the best offer, mainly the easiest.  Filling out a mailing from your current company is much easier than seeking out a better deal and moving your business to another company. 

Getting the best deal on a balance transfer takes a little time.  However, the money that can be saved more than pays for it.  If a consumer had opted to transfer $5,000 using the balance transfer check from the mail, they would have spent $548.19 on interest over the course of a year.  If that same consumer had taken a few minutes online to find a better deal, they would have paid $0.  Not too bad for twenty minutes of online searching.

The balance transfer market continued to tighten over the past few months, with more and more companies raising fees, eliminating no fee offers, and tightening the credit requirements for approval.

Discover, the last major bank to cap balance transfer fees at $75 per transaction, is now charging a full 3% on all balance transfers.  This is unfortunate as it leaves consumers with virtually no option of getting a 0% APR balance transfer for a full year without paying a full 3% balance transfer fee.

Bank of America also added to the balance transfer market malaise by removing the last major bank issued credit card that charged no fees and offered a 0% APR for 6 months.  Although this card offered no fee balance transfers, the APR after the introductory period was 14.99%, making this offer good only for those who could afford to repay their balance in full during the introductory period.

Capital One does offer no fee balance transfers with one of its card.  However, this card has some big drawbacks.  First, it does not offer a 0% APR; instead, it offers an 8.9% variable APR.  In about four months, the money you would have spent on fees will be spent on interest. 

The second drawback to this no fee offer is that the credit card is designed for people with average credit and has a maximum credit limit of $3000, generally less than most would need.

No balance transfer Catch 22 is more insidious than default.  Essentially, default occurs when you fail to pay your bill on time.  When this occurs, your 0% interest rate is voided and you can be charged anywhere from 11% to as much as 29%, depending on the specific terms of your credit card company.

In the past, it was often possible to negotiate your way out of credit card default.  However, over the past year, credit card companies have been seizing every opportunity they can to raise interest rates on consumers. 

What can trigger credit card default?  As absurd as it sounds, sending in your payment one day late can be enough to send your interest rate from 0% to 30%.  Similarly, going over your credit limit may trigger the same penalty.

Fortunately, avoiding this Catch 22 is relatively easy:  simply pay your bill on time.  In fact, pay it early, just in case.  However, many of us are having a hard time keeping current on our bills.  If that is the case, it is important to prioritize your expenses.  If you can put off a cable bill and use the money to pay your credit card bill, by all means do so.  Going in default on a $5000 credit card balance can cost you as much as $1500 in interest.  Paying your cable bill late may mean watching more network TV than you are used to.  However, that is a small price to pay in comparison to cost of defaulting on your credit card.

While the subject of international credit card transaction fees is a little off topic, we thought this info may be useful to people travelling abroad over the holidays.

Essentially, almost every credit card company charges a foreign currency transaction fee of 2% to 3% for every purchase made abroad.  However, Capital One is the sole major credit card company that does charges no international transaction fees.  American Express only charges a 2% foreign transaction fee, but outside of your hotel and major locations, there’s always a chance your card won’t be accepted.

Many people are unaware of international transaction fees, as credit card companies bury this information in the fine print.  However, some people who are aware of these fees often opt to use their debit cards instead of a credit card.  This can lead to some unpleasant consequences.

One of the main benefits of using your credit card for international travel is fraud liability.  If your card is lost or stolen, you can get a new one sent to you and the money spent fraudulently will generally not effect your available credit.  However, if your debit card is stolen and misused, the money spent will be deducted from your available balance, and you may end up waiting weeks for the money to be available in your account.  Obviously, this can be a huge problem, especially if you need the cash in your bank account.

Because of the issues that can arise when using your debit card for international transactions, the best option is to use a credit card with no international transaction fees.  However, if you don’t have time to get a new credit card that doesn’t charge fees, it is worthwhile to pay foreign transaction fees so you can have piece of mind.

In our last article on Balance Transfer Catch 22’s, we discussed balance transfer checks.  This article covers a similar credit card trick:  different introductory periods.  For example, some credit card companies will offer consumers a 0% APR on balance transfers for 1 year and a 0% APR on purchases for 6 months.  In the fine print, the same trick that applies to balance transfer checks comes into play. 

The trick behind this deal is that all payments you make are applied to the balance with the lowest interest rate.  Thus, when your 0% purchase APR jumps to the standard APR after the 6 month 0% period expires, any payment you make will reduce the portion of your balance that is still being charged a 0% APR.  Consequently, if you have a $2000 balance transfer with a 0% APR and $2000 in purchases being charged a 12% interest rate, the first $2000 you pay your credit card company will reduce the balance with the 0% interest rate while you accrue interest on the other $2000 of your credit card debt.

This trick can easily go undetected, as a person would have to closely inspect their credit card statement to catch on to this practice.

Fortunately, if you haven’t already been victimized by this practice, it is easy to avoid.  When you apply for a 0% APR balance transfer knowing you will be making new purchases, find a card that offers a 0% rate on both purchases and balance transfers for a full year.  If, however, you have already been trapped by a credit card with two different introductory periods, stop using your credit card for new purchases and consider getting a new, 0% credit card.

On December 5th, Bank of America pulled the Pet Rewards Visa from internet marketing channels.  This card, which had offered a 0% APR for 6 months on no fee balance transfers, was the last credit card from a major company to offer a no fee, 0% APR deal.

While this is yet another setback, the removal of this offer is not the worst news for most consumers.  In fact, it may save consumers money in the long term.  The issue with this card, like all credit cards that offered no fee balance transfers for 6 months, lay in the fact that after the 0% period expired, the interest rate jumped to 14.99%.  Thus, unless you repaid your outstanding balance in 6 months, you may have ended up giving back all the balance transfer fee savings by paying interest.

A year ago, it was very possible to transfer balances from card to card and keep 0% rates going for years at a time.  However, credit card companies have really cut back on the availability of 0% offers, and most consumers will find it difficult to do balance transfers every 6 months.

Thus, the best balance transfer offers for consumers remain credit cards that offer a 0% APR for a full year on purchases and balance transfers.  While some will shrug at the idea of paying the 3% balance transfer fee, the money that can be saved on interest over the course of a year more than offsets this nuisance fee.