I’ve written more than I ever thought I would about credit card balance transfers, but it seems most people are still in the dark when it comes to these money-saving tools.
I would venture to say that most credit cardholders see balance transfer offers packaged among their monthly credit card billing statements, and do little more than throw them away (after ripping them up).
Those that do read the offers are probably confused, to say the least, because nobody does a great job of explaining them.
[See: How does a balance transfer work for more on that.]
The Balance Transfer Trap
But today, I want to talk about the “balance transfer trap,” which is essentially why credit card issuers offer balance transfers in the first place.
When it comes down to it, credit card issuers aren’t out to save you money. No company is truly out there to save you money.
They want to make as much money as possible and increase their own profits in the process.
They see an opportunity, and know that offering you a little something upfront could lead to a long-term payday for them.
They’re thinking marathon, while you may be obsessed with the sprint.
The Promotional APR on Balance Transfers
What am I getting at? I’m talking about the veritable bait and switch credit card issuers use to get you in the door.
You see, most credit card balance transfers come with 0% APR for a certain period of time, usually 12 months or longer.
After that, the balance transfer APR rises to the variable purchase rate, which could be in the 20% range or higher, depending on the card.
So their goal is to get you to sign up, move your credit card debt to them, and then play the waiting game, ever so patiently.
During that promotional period, their hope is that you make just the minimum payment, so that after a year, your slightly reduced credit card balance will now be subject to their sky-high interest rate.
This, in effect, is how they steal your valuable credit card debt from the former credit card issuer, and make big money as a result.
You Against Them
Essentially, you and the balance transfer credit card issuer have differing goals.
They want you to carry a balance beyond the promotional period, while your goal should be to pay off the entire balance before the APR resets.
If you accomplish this feat, you’ll pay nothing in the way of credit card finance charges (interest), less any balance transfer fee.
[Use a no fee balance transfer to save even more money.]
But if they accomplish their goal, which they often do, you’ll wind up paying them a lot more money than they save you.
So when shopping for a balance transfer, be sure to do the math and setup a payment plan to tackle the debt before the interest rate resets.
For example, if you transfer $2,000, pay $167 each month for a year and you win.
Otherwise, you could just be wasting your time and money, and letting another credit card issuer take advantage of you.
Read more: Balance transfer problems and pitfalls.