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There is no need to pay high credit card fees when you can
transfer your balance to a low interest credit card. Balance
transfers are one the smartest and easiest ways to reduce
credit card costs. You have to be aware of the terms and conditions
of the new card to save on the costs.
Before getting another credit card you can try asking your
existing card company if they will lower their interest rate.
They may reduce the rate if they want to retain you as a customer,
if not, you can transfer the balance to a lower interest credit
card.
Why Use a Balance Transfer?
There are many benefits to transferring balances to a lower
interest credit card. It helps you to reduce the rates and
the fees considerably. Interest rates on balance transfers
and purchases vary with different credit card companies. Most
cards charge 0 percent for the first 6 to 12 months.
For example, the Chase Ultimate Rewards MasterCard and Citi
Platinum Select MasterCard charge no interest for 12 months
on balance transfers and purchases. The Discover Platinum
Card and the Hess Visa from Chase drop the introductory rate
after eight and six months, respectively.
Some cards link the initial Annual Percentage Rate (APR)
to billing cycles. The GM Card and Fifth Third Bank Cash Rewards
MasterCard, respectively, charge 0 percent APR for the first
six and four cycles.
Transferring balances can also give you additional benefits.
For example, you may be able to get a new card that carries
no annual fee, a longer payment grace period or cash back
on purchases and other rewards. Some cards also offer car
rental insurance, identity theft protection programs and money
saving discounts.
How to Transfer Balances
Most credit card companies use low interest rate balance transfers
to attract new customers. There are three main ways to transfer
the balance on a card. One way is by filling out the paperwork
provided by your new card issuer. You can transfer balance
by contacting the credit card company and informing them that
you want to transfer a balance to them and make arrangements
for a balance transfer.
You can also transfer balances by writing balance transfer
or convenience checks. These checks look and act like regular
checks. You simply write a check for the amount of the balance
transfer and send it to the company you want to transfer a
balance from. Some checks have an expiry date, so make sure
you use them within the necessary time frame. If you don't,
you'll be charged the regular (higher) interest rate set for
your card.
You can only transfer as much as the permissible credit limit
on the new card regardless of which method you choose.
Transaction Cost and Other Fees
Balance transfers are considered to be similar to cash advances
by banks and have similar transaction fees. There's no fee
for balances transferred in response to special offers. But
for Citi Platinum Select and many other companies, the transaction
fee for balance transfers is 3 percent of the amount of each
balance transfer, with a $5 minimum and $50 maximum. This
makes transferring of small amounts expensive as the transaction
fee may offset your potential savings.
Besides standard transaction costs, banks also charge special
fees that you may not be aware of. Some of the most common
special fees include:
Late fees - Some banks wait a few days before imposing a
late fee. But many impose it the day after the payment is
due. Either a flat fee of $10 or $15 is charged, or a percentage,
such as 5 percent, of the minimum payment due. Always mail
your payment much before the due date to avoid late fees.
If you pay your bill at the bank's branch or ATM, find out
how long it will take to process your payment. Sometimes payments
made at a branch or ATM isn't credited for a few days, so
consider that time lag and pay in advance.
Over-credit-limit fees - Most cards charge a fee if you exceed
your credit limit. These fees are charged each time you cross
your limit, so you could be hit with several of them during
the same billing period. Generally banks charge $10 or $15
as these fees or up to 5 percent of the exceeded amount. These
fees are in addition to interest charges.
Lost card replacement fees- If your card gets lost or is
stolen more than once and you need a new one, some companies
will charge you for a replacement. These fees range from $5
to $10.
Making Payments
After you transfer balances, make all your payments in full
and on time to avoid being charged with higher fees. Generally,
there's no grace period for repaying balance transfers, so
interest will accrue immediately. (No interest will actually
accumulate if you have an introductory 0 percent APR.)
While making payments you should be aware that they will
first be applied to balances with lower or promotional balances
and then allocated toward higher APRs. That means you'll be
paying down 0 percent balance transfers before you reach the
balance on regular purchases, which can be charged at a rate
of 9 to 18 percent. It is thus prudent to consider using a
different card for your regular purchases and pay off the
balance each month. Keep your balance transfers restricted
to a separate card.
After the Promotional Honeymoon Ends
You need to track the introductory period, as the rates will
increase to their normal level, as soon as it expires. The
standard variable APR for Citi Platinum purchases (8.99 percent)
will be applied to all remaining purchase and balance transfer
amounts. Likewise, the standard variable APR for cash advances
(19.99 percent) will be applied to all remaining cash advance
amounts. If you default on Citi Platinum's card agreement,
the company can immediately increase the APR on all balances
including any promotional balances to a variable default rate
of 28.99 percent.
Your credit history is a very important factor as the post-introductory
APR will depend on it. If this interest rate is substantially
higher than the rate on your old card and you have a remaining
balance, you'll end up paying more money and losing all your
savings. Of course, you could always transfer your balance
to a new card with a lower promotional rate. But this may
draw you into a never ending vicious cycle that may boomerang
on you at some point.
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