Smart balance transfers has long derided the practice of allocating consumer payments to the portion of a credit card’s balance with the lowest interest rate. Here’s a common situation:
A person has$1000 in debt being charged 14% and does a 0% balance transfer from another credit card for $1000. The first $1000 that person pays back reduces the balance being charged 0%, leaving them with $1000 in debt being charged a 14% interest rate.
A common tool used by banks for this dirty trick is the balance transfer check. These used to arrive in the mail weekly, and entice cardholders to move high interest debt to a 0% APR. Deep in the fine print, or long after they’ve used the balance transfer check, these consumers might realize they are paying down the low interest balance. However, it is easy to imagine that many consumers overlooked this. After all, the banks weren’t making it particularly easy to uncover this nasty trick.
The Credit Cardholders’ Bill of Rights provides protections for these transactions, forcing credit card companies to apply all payments above the minimum towards the highest rate balance. This is a good deal for people who have been deceived by balance transfer checks and confusing balance transfer offers. It is hard to blame these consumers for making the mistakes. Nevertheless, it is yet another situation where the mistakes of the many will inhibit the options of the few.
This is not a pro-deceptive practices argument, and I sympathize with anyone who has fallen prey to this trap. However, like many of the other measures being proposed, these changes will fundamentally influence the quality of balance transfer offers available to all consumers, and for the worst.
In the same vein, I stumbled upon an article in which the author states that, “under a proposal by President Obama’s administration, the low rates would have to last for at least six months.” This is the first time I encountered this information, and it too bodes poorly for balance transfer credit cards, particularly given the fact that typical 0% APR and low rate offers last for twelve months, not six. Should the administration force all credit card companies to offer low rates for a minimum of six months, which most already do, might that not prevent them from offering 0% rates for 12 months.
These are two more of the many Catch-22’s that will further limit the ability of savvy consumers to take advantage of long term 0% balance transfer deals that have, for the past five years, helped innumerable consumers get out of debt with lower interest expenses.
Nevertheless, these changes will help the vast majority of credit card users, and perhaps that is what is best for our country and economy right now.
