Recently, a number of consumers have reported issues with balance transfer deals offered to them by their current credit card companies. One consumer recently informed Smart Balance Transfers that a balance transfer/cash advance check mailed to him bounced when he tried to use it. Another consumer reported that she was offered a low rate balance transfer from her current credit card company that led to a credit limit decrease and a rejection of her balance transfer. This latter incident is a cause of concern.
Before the CARD Act, credit card companies loved to get their customers to transfer balances from other credit cards to their company’s cards, especially if the customer had a balance. The reason credit card companies loved these balance transfers was that, before the CARD Act, they could apply all payments above the maximum to the balance with the lowest rate. Thus, a person with a $5,000 balance at a 14% rate who transferred $5,000 to a 0% rate would have their payments reduce the balance with the 0% rate, rather than the 14% rate. If that person paid down their credit card balance by $5,000, they would owe $5,000 at 14%.
Under the rules of the CARD Act, payments are now allocated to the balance with the highest rate. This reduces the incentive for banks to lure their customers into doing low rate balance transfers, which is why you may have noticed a sharp decline in these mailings.
Joyce, the visitor who brought this issue to my attention, received a 3.99% balance transfer offer from Bank of America that a customer service representative encouraged her to take advantage of. Looking to reduce her interest expense, she opted to accept the offer and transfer two balances. Unfortunately, the bank had a change of heart in the midst of processing the transfer.
According to Joyce, the bank decided that she, “owed too much money,” and decided to not only revoke the balance transfer deal, but reduce the credit limits on two of her accounts. When she tried to explain to a manager that she was working to reduce her debt, the manager simply insisted that she could, “theoretically turn around and charge more and get right back into debt again.”
Joyce’s story is a clear sign that it is best to beware banks bearing gifts. Balance transfer deals are great ways to save money. However, the best balance transfer offers are unlikely to come from the banks that already have your business. The best balance transfer deals, which generally offer 0% interest rates for 1 year, are likely to come from a new credit card company eager to have you as a customer.
-Jeffrey Weber
For more information on 0% APR balance transfers, please see the main section of Smart Balance Transfers, where you can compare current offers and transfer balances online.
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January 3rd, 2011 at 1:48 pm
I just did a balance transfer with Discover-only to find out that they apply any payments to the balance transfer first, then to your monthly charges. So, unless I want to pay off my balance transfer( after giving them a 5% fee!), I will owe interest on the monthly charges. This is a very unprofessional way to do business. Beware Discover card balance transfers!!!!!
January 4th, 2011 at 1:17 pm
Allison,
I think you may have slightly misunderstood the situation. Every credit card company, and not just Discover, uses the entire minimum payment to reduce the portion of your balance with the lowest interest rate. In your case, its the 0 balance transfer. However, anything you pay above the minimum must be used on higher rate balances, which would reduce the portion with fees being charged a standard rate.