Dissecting The Balance Transfer Credit Card Option
When we look around the world of point of sale lending, mainly credit cards, we tend to notice a lot being said about balance transfer credit cards. So, what are balance transfer credit cards, where did they come from and why is there such a debate over balance transfer credit cards? I’ll answer all of these questions for you!
What Are Balance Transfer Credit Cards And Where Did They Come From
Balance transfer credit cards are specialty accounts that allow consumers to use them to pay off higher interest rate credit cards and consolidate multiple credit cards into one. There is quite an interesting story of supply, demand and corporate competition that lead up to the creation of these accounts. It all started when the first credit card offered to consumers turned out to be a huge hit. As more people heard about this new lending option, more people wanted to have it!
The big boom in loans issued through credit cards was noticed by several competing lending institutions. Watching as one lender made a business out of these rectangular pieces of plastic, other lenders started to catch on quickly. Soon, just about every lender offered their own variation of what we now know to be credit cards. Soon, some lenders started to design credit card products that would appeal to a specific group of consumers to carve a niche in the industry. Offering lower interest rates for those with higher credit scores or credit cards with high interest rates that those with poor credit scores could be approved for, more and more lenders jumped on the credit card band wagon.
As credit cards evolved, consumers started to have more options available to them. They didn’t have to settle for high interest rates any more, they could simply choose another card. However, with so much competition on the market, lenders had to start coming up with ideas that would help them make their offers more appealing than offers provided by other lenders. This is when several new concepts to the credit card industry were created including skymiles credit cards, secured credit cards, rewards credit cards, balance transfer credit cards and more.
What About The Debate That Surrounds Balance Transfer Credit Cards?
Lately, there has been a lot of conversation online and off about balance transfer credit cards. Those who like them really like them and those who don’t really don’t! So what is it about these cards that is causing such a debate? Well, it’s all about the promotional interest rates. When consumers are approved for balance transfer credit cards, they generally are provided an incredibly low promotional interest rate. The promotional interest rate will last anywhere from 6 to 18 months and soon increase to the standard interest rate! Some professionals are saying that this is a legal form of the “Bait and Switch” scam. Some professionals are saying the exact opposite. Below is My Opinion.
Are Balance Transfer Credit Cards Bait And Switch Scams?
NO! Not at all! The way I look at it, a bait and switch scam is when a company makes every attempt to tell you that you are getting one thing when, in all actuality, they are providing another. In these instances, not all information needed to make an educated decision will be provided in the “sales pitch” for the product. When it comes to balance transfer credit cards, the lenders make it very easy to understand the terms of balance transfer credit cards before you apply! Below is a list of things that you will find included in just about all balance transfer credit card promotions:
- Promotional Interest Rates – This is the “eye catcher” rate. It is a short term interest rate that can be as low as 0% and will generally last from 6 to 18 months.
- Standard/Purchase Interest Rates – This is the long term interest rate for the credit card. Once the promotional period expires, this is the interest rate that consumers will pay for balances accumulated through balance transfers.
- Balance Transfer Fees – The balance transfer fee is a fee that is charged for the act of transferring a balance, as it’s name suggests. In most cases, balance transfer fees will range from 3% to 5% of the total dollar amount being transferred.
- Annual Fees – This is the fee that is charged on an annual basis to cover the costs of services provided through your credit card.
In my opinion, if all of these pertinent pieces of information are included in the promotions of balance transfer credit cards, consumers have everything they need to make an educated decision when choosing to apply for these cards. With that said, I do not consider balance transfer credit cards to be a bait and switch scam.
Are Balance Transfer Credit Cards
A Debt Relief Option?
The answer to this question really depends on the extend of debt relief that the consumer needs. If you are facing a financial hardship and struggling to pay your bills each month, chances are, this is not the option for you. However, if you are tired of paying high interest rates, are not impressed by your lender or, simply want to consolidate multiple credit card debts into one easy to manage account, this may be the option for you. When considering balance transfer credit cards as a debt relief option, you should keep the following things in mind:
- It Takes Good Credit To Qualify For A Balance Transfer Credit Card – Balance transfer credit cards are generally designed as a benefit to those who have good to excellent credit scores. If you are experiencing overwhelming credit card debt, chances are, you will not qualify for these types of accounts. However, if you have kept your debts in good standings, you probably have pretty good chances of being approved.
- Your Debt To Income Ratio Plays A Role – One factor that consumers are often unaware of is the inclusion of debt to income ratio in the decision to approve or decline your application. If you already have credit card balances that are above 10% of your annual income, you may find it difficult to get approved for a balance transfer credit card.
- To Keep Your Promotional Rates, You Have To Pay On Time – One of the most difficult things to do for those who are experiencing overwhelming credit card debt is to make their payments on time. If you miss a payment during the promotional period, your promotional interest rate will expire and you will find yourself paying either the standard or default interest rate. Therefore, if you are not 100% dedicated to keeping your account in good standings, balance transfer credit cards are not the option for you!
Steps To Comparing
Balance Transfer Credit Cards
If you are considering this option, it is well worth taking your time to do a proper comparison. There are several factors that play a role in how effective balance transfer credit cards will be in your unique financial position. Therefore, below, I have compiled a list of steps to take when comparing balance transfer credit cards:
- Compare Lenders – The first factor that you should compare when it comes to balance transfer credit cards or any other type of credit card for that matter is the lenders that issue the cards. When you open a new credit card, you are starting a new financial relationship that will play a crucial role in your financial stability. It is important that you start this relationship with a lender that you know and trust.
- Compare All Interest Rates – Promotional interest rates are fun and, well, they’re eye catching but, all other interest rates are important as well. When comparing balance transfer credit cards, you will generally come across standard, cash advance and default interest rates along with the appealing promotional rates! Standard interest rates are the rates that you will pay for balances accumulated through standard purchases and balance transfers after the promotional period. Cash advance interest rates are the rates that you will pay on balances accumulated through cash transactions. Default interest rates are the rates that you will pay on all balances if you default on the account in any way. Examples of defaults are late payments and spending more than your credit limit. When comparing balance transfer credit cards, make sure that you look into all of these rates.
- Compare All Fees – As with any other type of credit card, each different balance transfer credit card will come with it’s own unique set of fees that will be charged to the consumers who decide to use it. These fees generally include balance transfer fees, annual fees, foreign transaction fees, over-limit fees, returned check fees, late payment fees and more! Before you ever apply for any type of credit card, you should read the entire rates and fees section of the terms and conditions to get a thorough understanding of any and all fees you may find yourself paying.
- Compare Rewards – Finally, most balance transfer credit cards come with rewards programs. Some may provide travel benefits, some cash back, some will send you gift cards. It is best to choose a balance transfer credit card that will offer rewards that you will be eager to use!
Summing It All Up
Balance transfer credit cards are a scam but, they are not for everyone either. If used properly, these cards are great tools that help consumers to build financial stability. However, if used improperly, as with any tool, they can generate quite a bit of damage. It is up to the you to compare your options before choosing balance transfer credit cards. Once you have compared your options, if you find that balance transfer credit cards are the best option for you, it’s important to compare the different offers available to you. While comparing, make sure that you understand how the card you choose works! If you do your part and use your card properly, you may find that balance transfer credit cards are just the tool you needed!
About The Author – Joshua Rodriguez
This article was written by Joshua Rodriguez, proud owner and founder of CNA Finance. This article was inspired by Joshua’s most recent personal finance series “Balance Transfer Credit Cards – A 7 Step Guide To Understanding This Option“.