A few weeks ago, a Facebook page declaring December 11th as Balance Transfer Day sprung up. This marginally coherent “movement” to occupy credit card companies was clearly aiming to piggyback on the success of the Move Your Money Project as well as the Occupy Wall Street (or whatever irks you today) Movement.
The stated goal of the “movement” was to get consumers to utilize low and 0% balance transfers as a way to save money while getting back at major credit card companies. The underlying logic and motives weren’t so clear.
Earlier this week, Candice Choi of the Associated Press wrote an excellent investigative article questioning the motives of the people behind Balance Transfer Day. This controversy brought national attention to the matter and, in the process of shooting holes in the “movement,” it also served to increase awareness of balance transfers.
Consequently, the Balance Transfers Day controversy may end up helping consumers more than the “movement”.
How Consumers Can Benefit from Balance Transfers Day
Simply put, balance transfers allow consumers to transfer high interest rate debt to a new credit card that offers a low and/or 0% interest rate for anywhere from 6 months to a current maximum of 21 months. During the 0% introductory period, consumers pay no interest on outstanding balances. The ability to avoid interest expenses during a 0% balance transfer promotion can help consumers pay down the principle portion of their credit card debt faster or, at the very least, prevent interest from piling up.
Ideally, consumers should use balance transfers strategically as a means to get out of credit card debt. However, even if balance transfers are simply used as a way to avoid interest, consumers still end up with more money in the bank than they would have if they kept their debt on a high interest credit card.
Determining if a Balance Transfer is a Good Financial Move
Before filing out a credit card application, it is important to understand the terms and conditions of typical balance transfer offers to ascertain whether or not doing a balance transfer makes financial sense. One of the first factors that needs to be considered is the balance transfer fee. Presently, nearly all major credit cards that offer 0% balance transfers charge fees of 3-5% with 3% being the standard fee. This works out to $30 for every $1,000 transferred.
A person with $1,000 of credit card debt at a 12% interest rate will likely spend the equivalent of a balance transfer fee in interest over the course of three months. If repaying debt in three to six months is a possibility, doing a balance transfer with a fee will only provide minimal, if any savings.
Consumers who anticipate needing six months or more to repay debt stand to benefit from balance transfers. A person with $3,000 of debt on a card with a 15% interest rate who can afford to pay $150 a month would need two years to get out of credit card debt and would spend $474 on interest during this period. Were that same person to transfer their balances to a credit card that offered a 0% APR for 21 months and charged a 3% balance transfer fee, it would take just under 21 months of $150 payments to become debt free and only cost $90 in fees, a savings of $384.
Apart from balance transfer fees and 0% introductory durations, a final element of balance transfer offers that must be carefully considered before doing a balance transfer is the long term or go-to interest rate that applies to outstanding balances once the 0% period expires. Most credit card offers list multiple long term interest rate options that are not determined until after applications are submitted. The rate a consumer gets will be based on the issuing bank’s review of their applications.
Because this rate is not revealed until after an application is submitted, consumers who anticipate having an outstanding balance once the 0% rate expires should wait until their credit card arrives in the mail to review the long term rate before transferring balances.
Consumers who know they will be able to repay the vast majority of their credit card debt before the 0% rate expires will obviously be impacted minimally by the long term rate. But those who anticipate having a substantive portion of their debt outstanding when the regular interest rate kicks in should reconsider transferring balances to a 0% card that has a significantly higher rate than their current cards.
MAKING THE MOST OF BALANCE TRANSFER DAY
Unlike the Move Your Money Project – which was started by a consumer and aimed at getting other consumers to ditch large national banks in favor of local banks and credit unions – Balance Transfer Day is not a way to protest or penalize Too Big to Fail banks. In fact, participating in Balance Transfer Day would likely help these institutions, as the large banks that generally offer the longest 0% balance transfer promotions collect fees on balance transfer transactions and benefit from gaining customers from their competitors.
Consequently, Balance Transfer Day is best viewed as a good way to get consumers to reflect on their credit card debt situations. Some may find that doing a balance transfer can save them money; others may be motivated to focus on paying down debt sooner. Either way, any event that gets consumers thinking about how credit card debt impacts their finances is a good thing.