Wednesday, September 2, 2009

Game Change for Balance Transfers

Some people enjoy a game called “balance transfer.” Usually balance transfer offers carry a low interest for a specified period of time. It could be 6 months to a year. After that the rate rises. Game players watch the calendar carefully and try to switch before the good rate expires. The game is still going, but with pending credit card regulations poised to chip away at credit card company profits, the rules are changing.

Balance transfers almost always carry a fee. Typically this fee has been 3% of the transfer amount. But some companies like Chase are guarding against the future. They expect that changes to credit card regulations will deeply affect their profits, so they’re looking to get more out of people who play the balance transfer game. At Chase the transfer fee has risen to 5%. Usually the transfer fee has been capped at around $100. This is might change as well. Expect to see an increase in transfer fee caps.

When you look at how these increases translate into dollars, it might seem a small price to pay for a better rate. The highest fee for a transfer of $10,000 would be $500. But then a fee cap would reduce that significantly.

Here’s how it all plays out in an example.
Say you have $10,000 on a card with a 21% interest rate.
Minimum payment = $273.25
But you can afford a fixed payment = $355
At this rate it will take you 40 months to pay down and cost you $3,897.86 in interest.

Transfer that balance to a promotional balance transfer at 5% for 9 months with $150 fee and here’s what you get. (Keep your payment the same at $355)
After 9 months you’ve:
paid $323.93 toward principal
paid $31.07 to interest
balance = $7,132.57

If you stayed with the original card after 9 months you’ve:
paid $206.80 toward principal
paid $148.20 to interest
and your balance = $8,261.85

Your balance difference between the original and the transfer is $1,129.28. That puts the transfer fee into perspective.

It seems like the changes will make the balance transfer game more exciting as it will be a bigger challenge to find the lowest transfer fee and the best rate. But I’m still not a fan of the transfer game. It requires way more time, effort and brain power than I can handle. If you forget and don’t transfer your balance to another card before the rate changes you’re probably paying much more. Plus it can wreak havoc on your credit score.

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