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.

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.

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.

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