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.

At present, many major credit card companies are offering 0% interest rates for up to 12 months on balance transfers.  However, with some of these offers, only people with the best credit profiles actually get 0% rates for a full 12 months.  The remainder fall into the “up to 12 months” category, which can mean getting a 0% interest rate for as little as 6 months, thanks to some fine print trickery.  (My personal choice for the best balance transfer credit card offers a 0% for a full 12 months.)

Balance transfer fees are currently ranging from 3 to 5 percent, though 5% is becoming more common than 3% lately– the card I consider to be the best presently charges a 4% fee–and these fees are likely to remain the same, if not rise to 5%, as consumers stuck with high interest credit card debt have little choice if they wish to save money on interest.

While predicting the future of balance transfer offers can be a fruitless task, key trends have been in place for over a year.  Those trends point to shorter 0% interest periods and sustained high fees.  The days of no fee balance transfers are long gone and, should the economy continue to falter, 0% interest rates may be replaced with 3% introductory interest rates.  For the time being, however, getting a 0% interest rate on balance transfers for a full year is still possible.  Hopefully, the same will be true when April rolls around.

-Jeffrey Weber

For more information on current 0% interest balance transfer offers, please see the main section of Smart Balance Transfers, where you can compare deals and apply online.

Varying studies indicate that the average household carries nearly $11,000 in credit card debt on credit cards with average interest rates of around 14%. Lowering your APR by even 5% on that amount would mean an annual savings of almost $600. Taking advantage of a 0% balance transfer offer would save more than $1,500 in the first year. It’s important to keep in mind that many of these balance transfer offers come with a one-time fee attached, usually around 3 to 5% of the total, but even with the fee, the amount you can save is significant.

Let’s take a look at three scenarios where credit card holders can save money by transferring a balance to a lower rate credit card.

• A card holder with a balance of $10,000 and an APR of 12% would save $1,268 in the first year by transferring his balance to a 0% interest card.
• A family with two cards totaling $15,000 and an average APR of 17% would find their annual savings to be $2,758 if they transferred their balances to a 0% interest card.
• A couple whose combined credit card debt is $18,000 and who pay an average APR of 25% on their cards would realize a savings of more than $5,000 a year in interest by completing a balance transfer to a 0% interest card.

In all of these scenarios, you can see that the average savings is significant – even considering any balance transfer fees. Suppose these individuals found a balance transfer offer that lowered their rates by only 10% each, their respective savings would still be $1,066, $1,674 and $2,159 per year! So, as you can see, it pays to research your options and shop around for a lower interest rate credit card. The savings you can experience by transferring your balances could be a pleasant surprise.

Just don’t wait too long to get started with a balance transfer.  The new credit card laws may lead banks to decrease the length of 0% balance transfer offers, making the balance transfer option less valuable.

 -Jennifer Davide

Before the CARD Act gained traction in Congress, typical balance transfer offers lasted for 12 months and charged a standard 3% fee, with a maximum amount of $75 per transaction.  Today, many balance transfer offers only last 6 months, and balance transfer fees range from 3 to 5% with no dollar limits.

Ultimately, the changes to balance transfer credit card offers have diminished the power of these money saving transactions.  In 2008, balance transfers were truly a free-lunch.  Thanks to the CARD Act, the bill for that lunch has come due.  Consumers can longer reap the large benefits they once did.  However, even with higher fees, balance transfers are still an effective tool in reducing interest expenses and, if used properly, in reducing the time it takes to get out of credit card debt.

In the past, just about everyone could benefit from balance transfers.  Today, however, 0% balance transfers provide substantial benefits to most people with interest rates of 14% or more.  Those with lower rates are both lucky and, unless they intend to fully repay their debt before the 0% period expires, likely better off keeping the good rate they currently have.

Consumers with interest rates of 15%, 20% or 25% will likely save around $100, $150, or $200 for every $1000 transferred to a new card with a 0% rate for 1 year and a 5% balance transfer fee.  This is no small amount and a good reason to consider a balance transfer if your current rate has recently been raised.  In a few months, getting a 0% APR for a year may not be possible, so acting now is important.  Balance transfer offers have become much less generous over the past year and in a few months, there may be few good deals around.

-Jeffrey Weber

For information on current balance transfer offers as well as recommendations, please see the credit card comparison section of Smart Balance Transfers.

Credit card debt is a fact of life for most Americans. In fact, one in three households carries credit card debt of more than $10,000. Add to this the fact that the average interest rate on credit card debt is nearly 15% and rising, and we can see a potential for economic catastrophe. One solution to this looming crisis is education – more Americans need to learn about the potentially destructive effects high interest payments have on their wealth, and what they can do about it. 

One solution that makes sense for many credit card holders is a balance transfer. Balance transfer offers are available from most credit card issuers and have introductory rates as low as 0%. For a reference of what a 0% balance transfer can mean to a credit card holder who carries a high balance, consider the following:

• A credit card holder with a debt of $5000 at a 15% interest rate and who pays a minimum payment of $200 per month toward the debt will take nearly 3 years to pay off the total amount.
• That same credit card holder who transfers his balance to a 0% interest rate for one year making that same $200 a month payment, and whose rate then returns to 15%, will have his debt will be paid off 5 months sooner… and will save more than $600.

What if the $5000 debt carries a 20% interest rate?

• The credit card holder who transfers his 20% debt to a 0% card for one year and makes his monthly payment of $200 will find his debt paid off 6 months sooner, for a savings of nearly $800.

These options for credit card interest and debt savings are available to any card holder with a good credit history. In these financially difficult times, any savings that we can reap from 0% balance transfers is worth taking. Knowing your options for saving money on your credit card debt can mean money directly back to your bottom line.

The rise of balance transfer fees is less of an issue than the decline of 0% offers.  A credit card that charges a 5% balance transfer fee, but offers a 0% APR for 1 year, will provide substantial savings to most people.  For example, a person with a $2,000 balance on a credit card with a 14% interest rate could save over $150 by doing a balance transfer and paying a 5% fee as long as the 0% rate last for 12 months. 

However, with a 0% period of 6 or 7 months, a person with a 14% rate will likely see no benefit.  Of course, anyone who has an interest rate in the high teens or twenty percent range could benefit from getting a lower interest rate once the 0% period expires.  Most others, however, need to be sure to avoid 0% offers lasting less than a year. 

One way to avoid paying high balance transfer fees on a credit card that only offers a 0% APR for 6 months is to carefully review the fine print.  Many credit cards advertise a 0% APR on balance transfers for 12 months, but may only grant you a 0% rate for 6 months, thanks to some fine print trickery.  If the credit card you are considering offers more than one 0% period, wait until your card arrives before transferring balances.  This way you can inspect your offer and make sure you’re getting a 0% for a full year and not wasting money on balance transfer fees.

For more information on credit cards offering balance transfers, please see the main section of Smart Balance Transfers.

When applying for any credit card, it is extremely important to examine the fine print.  The new credit card laws slated to take effect later this month may have given some the sense that fine print trickery was going to end.  It is not; in some ways, it is likely to get worse.  Such is the case with 0% balance transfer offers.

Three of the six largest credit card companies currently advertise 0% rates on balance transfer for either up to 10 months* or up to 12 months*.  However, each of these three companies places an asterisk next to the deal.  Why?  In the fine print, these offers state that applicants who meet their highest standards will get a 0% APR for the longest advertised rate.  Everyone else who gets approved will get a shorter 0% rate of 6 or 7 months.

The difference between getting a 0% APR for 6 months as opposed to 12 months is substantial, especially with balance transfer fees running between 3-5%.  With a 0% for 12 months, a person who transfers a $5000 balance from a credit card with a 15% interest rate will save close to $500 in interest.  And this includes a 5% balance transfer fee.  If the length of the 0% period is reduced to 6 months, the savings are minimal unless the balance is paid off before the 0% rate expires.

Because so many credit card companies offer 0% rates for up to 12 months and reserve the right to only grant approved applicants a 0% rate for 6 months, some consumers may have little choice but to apply for one of these offers if they seek a 0% APR.  If you fall into this category, wait until your card arrives in the mail before initiating a balance transfer.  This way, you can see how long your 0% for 12 months really lasts.

-Jeffrey Weber

There are many reasons to fear credit limit decreases.  Not only can they leave you without a credit card safety net, they can also lead to substantial reductions in your credit score.  While credit score issues can be fixed over time (and avoided to a certain extent), a reduction of a credit card limit at the wrong time can be devastating.  A horror story that highlights these issues was relayed to us from a visitor named Patti in October of 2009.

Patti was on her way to visit her terminally ill father.  Before leaving, she contacted her credit card company to check her available credit, as she would need her card to rent a car.  Confident she would have no problem, she boarded a plane and headed to the rental car desk.  And then another.  And then another.  No one would rent her a car because her credit limit had been cut below the level needed to rent a car, and you can’t rent a car without a credit card. 

Ultimately, Patti had to use a range of public transportation to get to the hospital.  But it was too late.  Her father had passed away while she was en route.  Patti missed a final chance to see her father because her credit limit was reduced.  (To read Patti’s full story, please see this article)

While this is an extreme situation, similar issues have surely happened to many.  And the only defense is to be prepared.  Preparation ultimately means having at least two credit cards with available credit, especially when travelling.  Preparation also means having cash available at all times so as not to find oneself without the means of paying for everything from a dinner out with friends to the baggage fees when returning from a vacation.

If you’ve recently experienced a credit limit reduction and need available credit, it is essential to apply for a new credit card as soon as possible.  If, for example, you had a $900 balance on a credit card with a $3,000 limit and that limit was cut to $1,000, you may experience a significant drop in your credit score.  This is due to the weight given to credit utilization ratios.  This element accounts for 30% of your credit score and if it is high (i.e. you are using 90% of your available credit), it can lower you score and make you appear maxed out to other lenders.  Thus, if you apply for a new credit card before your lower limit is reported to the credit bureaus, you will likely have a much better chance of getting approved for a new card.

Just as interest rate increases were all the rage last year, credit limit cuts will likely become the new black in the credit card world.  Preparation and fast, decisive action are the keys to getting snared by this tactic.

-Jenn Davide

For more information on what you can do when you credit limit is decreaed, please see the aptly titled article, What To Do When Your Credit Limit is Decreased.

For information on current  credit card offers, please visit the 0% credit card comparison section of Smart Balance Transfers.

Of course, the “Average Household” is a statistic.  Every household is different, and the amount you owe and the rates you pay are likely to vary significantly from the averages.  One tool available to estimate interest expense over the course of a year is the balance transfer calculator at Smart Balance Transfers.  This tool provides an estimate of how much a person will spend on interest at current rates vs. how much they would save by utilizing a 0% balance transfer for 12 months.

Using this balance transfer calculator, the “Average Household” could realize more than $1000 in interest savings by transferring their debt to a credit card with a 0% rate for 12 months.  Once balance transfer fees are taken into consideration, the total savings decline to around $700.  However, the benefits of doing a balance transfer go beyond one year.  Without compounding interest expenses, payments towards debt reduce the principle at a much faster rate, thus leaving you with less debt at year end, even if you make the same monthly payments.

Ultimately, consumers with good credit could easily pay $0 in credit card interest in 2010 if they were to make smart use of balance transfer credit cards.  Unfortunately, the lack of offers being sent out in the mail has caused many Americans to forget that 0% rates are still an option.  This is not the case.  0% deals, while nowhere near as generous as they were in the past, are still readily available.  Thus, anyone with good credit who shudders at the thought of spending $1000-$15000 in interest this year should look to available balance transfer offers as a means to reduce interest expense and expedite the process of getting out of credit card debt.

-Jeffrey Weber

To illustrate how a balance transfer to a 0.0% APR account can be beneficial, let’s use an example account with a modest balance of $1,000 on a relatively civilized 10.0% APR. Then let’s say a credit card issuer offers you a balance transfer of this $1,000 to a 0.0% APR account at a 5% balance transfer fee. If you accept the new credit card charges you 5% of that $1,000, or $50, as a fee to your new account. While this may sound pretty steep at first once you understand how finance charges work, then you see how this can still equate to quite a deal in many instances.

How are finance charges calculated? Monthly finance charges on your statement are determined by multiplying the monthly percentage rate, or MPR, by the account’s average daily balance for the previous billing cycle. On many accounts the average daily balance is calculated by the mean average of the daily balances of the past 30 days. In a real-life situation this can get quite complex, so for the sake of simplicity in our example we’ll assume our $1,000 balance is also our average daily balance. Think of it as making payments and charges of an equal amount during a given month, and you’re fairly close.

To calculate the MPR on most credit cards is a simple matter of dividing the APR by 12 (10.0/12 = 0.833333). Divide this number again by 100 to express the MPR in decimal terms. For our 10% APR example, the result is 0.008333. Then take this number and multiply it with the average daily balance, in our example $1,000. The result is $8.33.

So, given that our hypothetical monthly finance charge on a 10.0% APR card with an average daily balance of $1,000 is $8.33/month, you see this roughly equals the $50 balance transfer fee in 6 months. In other words if you expect to carry a balance of $1000 on your 10.0% APR account for more than 6 months, a balance transfer to a 0.0% APR account is worth it, even with a 5% balance transfer fee.

Let’s look at this example again but at the maximum allowable APR of 29.99%, which many people find themselves stuck with. The MPR on a 29.99% APR card expressed in decimal terms is 0.024992. Given our $1,000 average daily balance, the monthly finance charge is $24.99. In this case the $50 balance transfer fee effectively pays for itself in just 2 months.

Of course before making a decision on any 0% balance transfer offer, run the numbers yourself based on the formula provided to see how it impacts you. Remember to consider the average daily balance instead of your current balance. It’s on your statement, usually near the finance charge detail. Then if it looks good, do it!

-Jennifer Davide

Smart Tip 1:  Avoid “Bad Credit” Credit Cards

Consumers with bad credit and prior credit problems have long been actively targeted by less than scrupulous credit card companies looking to gouge them with high interest rates and absurd fees.  Smart Balance Transfer’s worst credit card of 2009 was a prime example of how sub-prime lenders prey on consumers looking to rebuild their credit.  The offer, from First Premier Bank, charges a seemingly fair $48 annual fee.  However, it also charged a $95 program fee, a $29 set up fee and a $7 monthly servicing fee.  Altogether, this credit card, which comes with a $300-$500 credit limit, charges consumers $256 in fees while providing little actual available credit. 

Consequently, while offers may promise to lend a helping hand, the companies providing these products generally have their other hand in your wallet.  Avoiding bad credit credit cards is a good way to avoid a credit repair nightmare.

Smart Tip 2:  Apply for a Secured Credit Card from a Major Bank

A good way to describe a secured credit card is a debit card with benefits.  To get a secured credit card, a person deposits money into a bank account and is given a credit limit equal to the deposit.  The benefit comes from the fact that your card activity is reported to the major credit bureaus.  Thus, if you always pay on time, you will develop a positive history on the account.  This, in turn, can help improve your credit score.

Generally, secured credit cards require a deposit of $300 to $500 and come with annual fees of around $30.  However, after 1 year, many banks will review your account and possibly release your deposit and grant you an actual credit line.

Like credit cards targeted to people with bad credit, the best secured credit cards aren’t heavily marketed.  Two offers worth a second look come from Bank of America and Citi.

Smart Tip 3:  Open an Account at a Credit Union

Unlike major banks, many credit unions are willing to take a more personal approach to credit card lending.  If you already use a credit union, stop by the branch and inquire about available credit products.  You may find that your credit union is willing to offer you a credit card, even if major banks have declined your applications.

If you don’t currently bank at a credit union, consider opening an account, setting up direct deposit, and establishing a relationship.  While you may not be able to get a credit card immediately, once the credit union sees your income, expenses, and more importantly, how well you manage your cash flow, they may consider you for a secured or unsecured card. 

Final Thoughts:  Rebuilding credit is a difficult, but important process.  However, by avoiding fee-laden “poor credit” credit cards and turning to major banks or credit unions to obtain secured credit cards, people with bad credit can rebuild their credit scores and reduce the cost of borrowing on everything from auto loans to mortgages.

-Jeffrey Weber