Credit card balance transfer


Credit card balance transfer

A credit card balance transfer is the transfer of the balance (the money) in a credit card account to an account held at another credit card company.[1]

Contents

Overview

This process is actively encouraged by almost all credit card issuers as a means to attract new customers. Such an arrangement is attractive to the consumer because the new bank or credit card issuer will offer incentives such as a low interest or interest-free period, loyalty points or some such other device or combination of incentives. It is also attractive to the credit card company which uses this process to gain that new customer, and of course detrimental to the prior credit card company.[2]

An order of payments for every credit card specifies which balance(s) will be paid first. In nearly all cases payments apply to lowest-rate balances first - highest-rate last. Any balance under a teaser rate or fixed rate will be paid off sooner than any purchases or cash advances (which usually have the highest APR). By avoiding making purchases or taking cash advances altogether, the borrower can ensure they maintain the full benefits of the original balance transfer.

The process is extremely fast and can be concluded within a matter of hours in some cases. Automated services exist to help facilitate such balance transfers. Other similar services do exist, but they may not be free to use.

Decisions on whether or not a card holder decides to transfer one's credit card balance depends on a combination of three things:

Normal rate

This is the normal interest rate on a credit card. The lower this rate, the better for the consumer (less cost of capital) and the worse for the credit card company (less profit). The transferred balance will be subject to same rate as the card's purchase (merchandise) rate. Occasionally the same terms will apply as to purchases that may be interest free until the payment date for the statement on which the transfer appears. More often such transferred balances move immediately to the full purchase rate. Credit card balance transfers involving transfer of funds from a high APR credit card or a store card (which often has high APR) to a low- or zero-APR credit card will result in a reduction in monthly outflows for the card holder.

Teaser rate

A teaser rate is an especially low rate that a credit card company offers to new customers to entice them to transfer their balance. It is a lure for catching new customers. With an extra low initial rate, transferring customers have lower than normal interest which ultimately means lower initial monthly outflows of money to the credit card company. The 0% rate is the most common when a new credit card account is opened.

This teaser rate is temporary. The duration of teaser rates vary from (typically) 6 to 15 months, after which the remaining transferred balance is subject to purchase rate. Failure to ensure the account is current (payments made on time) may result in the withdrawal of the offer rate. Customers should pay attention to the length of time of the opening offer, since once it is over there is a sudden increase in rates. This increase is the credit card company's method of making extra profits to make up for the losses of charging the lower introductory rate. Of course, this can be countered by switching to yet another credit card company.

Fixed Life of Loan rate offer: A low rate that is fixed until the transferred balance is paid in full. This type of offer is usually guaranteed only as long as the account is current (see Teaser rate). Whilst this allows the borrower to save interest on their existing debts without the need to initiate further balance transfers once a teaser rate offer expires, the fixed offer rate is higher than the limited duration teaser rate offer. (Typically, it may be between one-half and two-thirds of a fixed rate, fixed term personal loan)

Transaction fee

A transaction fee is a commission earned by the credit card company earning one's business and is a direct transfer of money from the user to the credit card company. This varies from (typically) 1-5% of transferred debt - sometimes with a maximum capped amount, but otherwise an uncapped percentage.

Balance transfer arbitrage

Because transferring to new credit cards often results in lowered rates, one can repeatedly make use of this process to save quite a lot of money over the years. The idea is to switch to a new credit card the moment the previous one's teaser rate has expired. There is a caveat: the credit card contract may include a clause preventing the credit card holder from transferring the balance a second time within a certain period of time. There may also be ways of extending the teaser rate or at least preventing it from disappearing prematurely. This method is often advocated by personal finance self-help sources. The strategy ultimately results in higher rates for the rest of the credit card holders since the credit card companies are being deprived of some of their money, and in order to stay profitable they have to charge higher rates.

To deter this type of behavior, many credit card issuers have stopped offering no fee balance transfers. Additionally, card issuers have raised minimum payment requirements to ensure cardholders actually pay off their balances. These changes have made it less attractive to carry debt, despite any promotional APR that may be included in the offers.[3]

References



Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Credit Card Balance Transfer — The transfer of all outstanding balances from one credit card to a new credit card. Credit card balance transfers are typically used by consumers who want to move their debt to a credit card with a lower interest rate, fewer penalties or other… …   Investment dictionary

  • Credit card balance transfers — A credit card balance transfer allows a credit card user to transfer the balance on their accounts to a new credit card. This is a process which is actively encouraged by almost all credit card issuers as a means to attract new customers. Such an …   Wikipedia

  • Credit card hijacking — is a form of credit card fraud and the term is used when a person’s credit card is used by some unauthorized person (e.g. a thief or overaggressive vendor) to buy goods or services. The credit card owner usually has trouble reasserting control… …   Wikipedia

  • Credit card interest — Finance Financial markets Bond market …   Wikipedia

  • Credit card — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Empl …   Wikipedia

  • Credit card cashback — When accepting payment by credit card, merchants typically pay a percentage of the transaction amount in commission to their bank or merchant services provider. Many credit card issuers, particularly those in the United Kingdom and United States …   Wikipedia

  • Credit card fraud — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Empl …   Wikipedia

  • Credit card terminal — A typical credit card terminal that is still popular today A Credit card terminal is a device that can do transactions with a debit card or a credit card. Several types of credit card terminals are available to merchants. Most have the same basic …   Wikipedia

  • Credit CARD Act of 2009 — CARD redirects here. For other uses, see CARD (disambiguation). Credit Card Accountability Responsibility and Disclosure Act of 2009 Full title An Act to amend the Truth in Lending Act to establish fair and transparent practices relating to the… …   Wikipedia

  • balance transfer — UK US noun [C] ► FINANCE a situation in which debt on a credit card is moved to a different card, usually to get a better interest rate: »The way to refinance credit card debt is through a balance transfer. »balance transfer rate/offer …   Financial and business terms