Credit card balance transfer: Difference between revisions
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|caption=[[Visa Inc.|Visa]] and [[MasterCard]] are the two most prominent payment processors for credit cards. |
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A '''credit card balance transfer''' is the [[Balance transfer|transfer]] of the |
A '''credit card balance transfer''' is the [[Balance transfer|transfer]] of the outstanding debt (the [[balance (accounting)|balance]]) in a [[credit card]] [[Account (accountancy)|account]] to an account held at another credit card [[company]].<ref>{{cite book|url=https://books.google.com/books?id=gtHyyQedvJUC&q=credit+card+balance+transfer&pg=PA196|title=Personal Finance|author=E. Thomas Garman|author2=Raymond Forgue|publisher=[[South-Western College Pub]]|year=2009|page=196|isbn=978-1-4390-3902-1}}</ref> |
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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. |
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This process is encouraged by most credit card issuers as a means to attract customers. The new bank/card issuer makes this arrangement attractive to consumers by offering incentives. Such incentives include low or even 0% interest rates, a temporary interest-free period, loyalty points, or other incentives. The 0% rate promotion is the most common incentive when a new account is opened. Especially low rates compared to the existing supplier entice potential customers to transfer their debt. The card issuers gain new customers, knowing that these holders are prone to accruing debt rather than regularly paying off the balance, which makes them a particularly desirable type of client. |
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Decisions on whether or not a card holder decides to transfer one's credit card balance depends on a combination of three things: |
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| ⚫ | Credit card terms specify the order in which payments are applied to balance(s). In nearly all cases payments are applied to the lowest-rate balances first and the highest-rate last. In countries such as Australia and Germany legislation requires the card company to instead first apply payments to the highest-rate balances.<ref>Section 366(2) of the German Civil Code (Bürgerliches Gesetzbuch - BGB)</ref> The banks invariably set the order of payment to ensure any balance at a reduced or fixed rate will be paid off sooner than new purchases or cash advances at a higher rate.<ref>{{Cite web|url=https://www.rbcroyalbank.com/onlineservices/balancetransferinfo.html|title = RBC Royal Bank Credit Card Balance Transfer – Important Information}}</ref> By avoiding making purchases or taking cash advances, the borrower can ensure that interest accrued every month is at the low beneficial rate of the original balance transfer. |
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This is the normal on a credit card. The lower this rate, the better for the consumer and the worse for the credit card company . The transferred balance will be subject to same rate as the card's purchase 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 credit card or a store card to a low- or zero-APR credit card will result in a reduction in monthly for the card holder. |
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A 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 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. |
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Balances cannot be transferred between cards with the same bank. |
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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. Teaser rates in the UK can often be longer than in North America, with (typically) 6 to 35 months available for UK balance transfers. 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. |
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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) |
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== Promotional offers == |
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==Transaction fee== |
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[[Companies' Creditors Arrangement Act|Companies]] often temporarily lower interest rates for promotional offers. The lower the interest rate, the less the cardholder ends up repaying. Balance transfers involving a transfer of funds from a high-interest credit card or a store card to another card results in a reduction in interest fees for the cardholder. It is in the cardholder's interest to seek out a low-interest rate. Once the promotional rate expires, any remaining transferred balance on the card is subject to the standard interest rate. The [[Coronavirus]] has shortened the length of some promotional period for balance transfers.<ref>{{Cite web|url=https://www.cnbc.com/select/0-percent-apr-balance-transfer-offers-disappearing/|title = Credit card 0% APR balance transfer offers are disappearing—here's why and alternatives|website = [[CNBC]]|date = 16 July 2020}}</ref> |
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Promotional balance transfer rates are usually only guaranteed as long as the account is current, meaning the cardholder consistently makes at least the minimum monthly payment. Failure to make these payments usually results in reversion to the much higher standard rate. |
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| ⚫ | A [[transaction fee]] is a [[Commission (remuneration)|commission]] |
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Cardholders with large debts can repeatedly transfer their balances to save significant interest repayments. The ideal approach is to switch to a new credit card the moment the previous one's teaser rate expires. To deter this type of behavior, some issuers stopped offering free balance transfers or impose a fee which can be a minimum amount or a percentage of outstanding balance being transferred.<ref>{{cite web | url=https://www.fool.com/the-ascent/credit-cards/balance-transfer-fee/ | title=What is a Balance Transfer Fee? | date=9 April 2021 }}</ref> There is a [[wikt:Caveat|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. |
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While the promotional interest rate applies and the minimum payment value remains low the cardholder has little incentive to repay the card balance resulting in prolonged debt. In the US card issuers are under pressure from various Federal agencies to increase the minimum payment value.<ref>{{cite web|last=Fowles|first=Deborah|title=Your Monthly Credit Card Minimum Payments May Double|url=http://financialplan.about.com/od/creditcarddebt/a/CCMinimums.htm|work=Financial Planning|publisher=About.com|accessdate=22 March 2012|quote=Under pressure from the Office of the Comptroller of the Currency (which regulates US national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit.|archive-date=17 January 2012|archive-url=https://web.archive.org/web/20120117054102/http://financialplan.about.com/od/creditcarddebt/a/CCMinimums.htm|url-status=dead}}</ref> Card issuers have raised minimum payment requirements to encourage cardholders to pay off their balances. These changes have made it less attractive to carry debt, despite any promotional [[Annual percentage rate|APR]]. |
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== References == |
== References == |
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Latest revision as of 18:28, 13 May 2024
 | This article needs additional citations for verification. (November 2017) |
A credit card balance transfer is the transfer of the outstanding debt (the balance) in a credit card account to an account held at another credit card company.[1]
This process is encouraged by most credit card issuers as a means to attract customers. The new bank/card issuer makes this arrangement attractive to consumers by offering incentives. Such incentives include low or even 0% interest rates, a temporary interest-free period, loyalty points, or other incentives. The 0% rate promotion is the most common incentive when a new account is opened. Especially low rates compared to the existing supplier entice potential customers to transfer their debt. The card issuers gain new customers, knowing that these holders are prone to accruing debt rather than regularly paying off the balance, which makes them a particularly desirable type of client.
Credit card terms specify the order in which payments are applied to balance(s). In nearly all cases payments are applied to the lowest-rate balances first and the highest-rate last. In countries such as Australia and Germany legislation requires the card company to instead first apply payments to the highest-rate balances.[2] The banks invariably set the order of payment to ensure any balance at a reduced or fixed rate will be paid off sooner than new purchases or cash advances at a higher rate.[3] By avoiding making purchases or taking cash advances, the borrower can ensure that interest accrued every month is at the low beneficial rate of the original balance transfer.
The process of a balance transfer can usually be concluded within hours. Automated services facilitate balance transfers between card issuers.
Balances cannot be transferred between cards with the same bank.
A transaction fee is a one-off commission charged by the company that receives the balance. This varies from (typically) 1-5% of transferred debt usually with a minimum value and sometimes with a maximum capped amount. The fee is usually added to the card balance.
Promotional offers
[edit]Companies often temporarily lower interest rates for promotional offers. The lower the interest rate, the less the cardholder ends up repaying. Balance transfers involving a transfer of funds from a high-interest credit card or a store card to another card results in a reduction in interest fees for the cardholder. It is in the cardholder's interest to seek out a low-interest rate. Once the promotional rate expires, any remaining transferred balance on the card is subject to the standard interest rate. The Coronavirus has shortened the length of some promotional period for balance transfers.[4]
Promotional balance transfer rates are usually only guaranteed as long as the account is current, meaning the cardholder consistently makes at least the minimum monthly payment. Failure to make these payments usually results in reversion to the much higher standard rate.
Cardholders with large debts can repeatedly transfer their balances to save significant interest repayments. The ideal approach is to switch to a new credit card the moment the previous one's teaser rate expires. To deter this type of behavior, some issuers stopped offering free balance transfers or impose a fee which can be a minimum amount or a percentage of outstanding balance being transferred.[5] 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.
While the promotional interest rate applies and the minimum payment value remains low the cardholder has little incentive to repay the card balance resulting in prolonged debt. In the US card issuers are under pressure from various Federal agencies to increase the minimum payment value.[6] Card issuers have raised minimum payment requirements to encourage cardholders to pay off their balances. These changes have made it less attractive to carry debt, despite any promotional APR.
References
[edit]- ^ E. Thomas Garman; Raymond Forgue (2009). Personal Finance. South-Western College Pub. p. 196. ISBN 978-1-4390-3902-1.
- ^ Section 366(2) of the German Civil Code (Bürgerliches Gesetzbuch - BGB)
- ^ "RBC Royal Bank Credit Card Balance Transfer – Important Information".
- ^ "Credit card 0% APR balance transfer offers are disappearing—here's why and alternatives". CNBC. 16 July 2020.
- ^ "What is a Balance Transfer Fee?". 9 April 2021.
- ^ Fowles, Deborah. "Your Monthly Credit Card Minimum Payments May Double". Financial Planning. About.com. Archived from the original on 17 January 2012. Retrieved 22 March 2012.
Under pressure from the Office of the Comptroller of the Currency (which regulates US national banks), the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, some national banks will soon be increasing minimum monthly credit card payments so they are closer to 4% rather than the current average of around 2%. Some major banks have already increased the minimum payments and others are about to follow suit.