Credit card balance transfers belong among the most frequent marketing strategies used by banks to hook up new customers. The basic logic is straightforward. If you are moving the balance of your old credit card forward each month then you are incurring interest. Let’s say it’s 20% and the new bank will offer you to pay just 3% or 5%. Surely, it’s looking very appealing at the first sight. But there are few booby traps in such deals.
(1) Booby trap #1: Lower interest is only for a limited time
Usually it it is valid only for about 6 months. Surely, even 6 months of lower interest can be useful and save you a lot of money. What you should look for is the interest rate that will apply once the 6 months are over. Make sure that your new credit card will not carry higher interest than your original credit card. Otherwise all of your 6 months interest savings can be wiped out in the following few months and even surpassed by the new higher interest rate.
(2) Booby trap #2: Increased credit limit as part of the deal
Your new credit card provider may not just transfer your credit card balance with all the other parameters remaining the same but they can increase your credit card limit at the same time. So for few months while you enjoying your low interest rate, you also increase your spending allowed by your new higher credit card limit. Later when your low interest period finishes, you may find yourself with considerable higher balance moved forward than what you use to have with your old credit card. And this means higher interest payments at the same time.
(3) Booby trap #3: Lower interest rate “until repaid in full”
Recently many banks started to advertise that you will pay lower interest rate not only for 6 months but until repaid in full. Well, that may sound great, but in fact it’s worse deal than the 6 months low interest period. The catch here is that as you keep repaying the old transferred balance, at the same time you are doing new purchases with your credit card. And the low interest rate applies only to the old ever decreasing balance. All new purchases will incur standard higher interest. So, in this case you are starting to pay the standard interest from the second month after you transferred the balance. And if you have high turnover on your credit card then the low interest period can be over way sooner than 6 months. At the end you won’t not save much. If your new credit card provider offered you higher limit with transferred balance then soon you may be paying higher interest than you used to pay before.
(4) Booby trap #4: Record on your credit file
Every time you apply for a new credit or credit card, the bank or finance company checks your credit rating. Every such check is recorded and when next time another providers does the credit check on you again, they can see all history of previous credit checks. If you have a pattern of “jumping the ship” or in another words changing the credit card provider regularly every few months then the pattern will form. And the banks are looking for such patterns. If they find one, later your ability to obtain credit can be hindered. It my be harder for you to get new credit lines approved or your interest rate can be higher. And not just on credit cards, but all types of credit, even personal loans or mortgages.
So, jumping the ship may save you some money in a short term, but in the long term it may cost you more money and also cause damage to your credit rating. You can do it, but don’t do it too often and be aware of the booby traps described in this article.