Definition
A balance transfer occurs when a consumer moves an outstanding amount of money owed on one credit card to another. There are often transaction fees associated with a balance transfer, and many credit card companies offer promotions to encourage consumers to transfer debt from other creditors to them.
Analysis
Many consumers transfer balances to take advantage of the promotions offered by many credit card companies. Creditors often offer low rates (even 0%) for an initial period of time on balance transfers in an effort to attract new customers. Some promotional offers even last for the life of the balance transfer. In some cases, these balance transfer offers can be a good deal for the customer.
However, many people do not have a good understanding of how balance transfers truly work, and do not get the good deal that they are looking for. Many balance transfers incur a transaction fee, which can be up to 4% of the balance transferred. The transfer usually includes a minimum fee, and some may have a cap on the fee. Recently, however, some credit card companies have eliminated the cap on the transaction fee.
Another potential pitfall for consumers occurs when the normal interest rate on the credit card is higher than the balance transfer rate. In this case, payments are applied to the balance subject to the highest rate first. So if a customer has a regular balance and a transferred balance at a lower rate, payments may not even be applied to the transferred balance, and finance chargers will accrue.
