Consumer Bulletin: Things to consider before you accept a balance transfer offer

Credit card issuers (including banks, credit unions or other financial companies) often try to attract new customers to their cards by offering low interest rates on amounts transferred from other cards. The special promotional rates are typically offered for a limited time. After the promotional period, interest rates generally increase significantly. 

At OBSI, we’ve recently observed an increase in complaints involving credit card balance transfers. The most common complaints are related to how balance transfers work, how interest is charged and how payments are applied. This bulletin provides tips for you to consider before you accept a credit card balance transfer offer.

Tip # 1: Understand how interest is charged

Read the cardholder agreement carefully. Look for information about how the bank charges interest on the account. Different cards have different terms and conditions, however, balance transfer offers typically have some features in common, such as:

• New purchases – Credit card consumers receive a minimum 21-day grace period when purchasing goods and services. This means that no interest will be charged in the first 21 days. Following this grace period, however, interest will be charged at the standard interest rate of the card.
• Unpaid balances – Unpaid balances, called “previous purchases” in card holder agreements, are charged the standard interest rate of the card. The bank will continue to charge interest until the amount owed is repaid.
• Balance transfers – Credit card companies charge interest from the time a balance is transferred until the balance is repaid, with no grace period. Lower promotional interest rates are typically offered for this balance until the end of the promotional period.
• Cash advances – Credit card companies generally charge a higher interest rate for cash advances. Like balance transfers, there is no grace period, and interest accrues from the date of the cash advance until it is repaid.

Card holder agreements explain how payments made to the credit card company for an account with outstanding balances are allocated to new purchases, previous purchases, balance transfers, and cash advances. New payments may be allocated proportionately or applied to certain categories first.

Understanding how payments will be allocated is important because the different types of balances often have different interest rates, so the allocation will impact the total interest rate charges for the following month.

Tip # 2: Understand all the terms and conditions that apply

The balance transfer agreement will include the terms and conditions of the promotional offer, including the promotional interest rate, how long the promotional rate applies, any fees associated with transferring the balance, how the interest is charged and what happens if your account is not in good standing. You should understand all of these terms and conditions and before accepting the balance transfer offer, consider that:

• You may need to open a new credit card account – Credit card companies often use balance transfer offers to attract new customers. These offers generally require consumers to apply for a credit card issued by the bank before transferring their balance to the new credit card account. Applying for credit usually involves a credit check, which can negatively impact the credit score of the applicant.
• The costs of the card may outweigh the benefits – Credit cards generally have a variety of features and costs. Be sure to understand all the costs associated with the card, such as annual fees and interest charges, because these can easily outweigh the benefits of a temporary promotional rate or other features, such as points or cash back.
• Your credit score may be negatively affected – Credit scores are impacted by a number of factors, including the number of credit accounts, the account balances compared to the total credit available, and the timely payment of balances. Consider carefully how a new credit card account will impact your total debt levels, credit score and your ability to maintain all your accounts in good standing.
• There may be lower cost alternatives – If you are looking for a lower cost way to carry a credit balance you should consider that lines of credit and personal loans typically charge less interest than a credit card. These more traditional loan products also will have more predictable interest rates, and the balance will decline over time as you make payments.
• Promotional rates are temporary – Transferring a balance to a credit card is most beneficial if you can pay off the outstanding balance before the promotional period expires and you avoid adding to the balance with additional purchases. The longer you carry a balance on a credit card, the higher the costs will be.

Refer to the fine print in the offer for full details. If there are any features you do not understand, you should contact the credit card company for answers.  

Tip # 3: Calculate how much it will cost

Promotional offers typically require you to pay a balance transfer fee to transfer a balance from your existing credit card to the new credit card. This fee often ranges from 2% to 5% of the amount of the transferred balance and is billed to your new credit card account in addition to interest charges. Fees can quickly add up when transferring larger amounts. Calculate the amount of this fee in comparison to the benefit you expect to receive as a result of any temporary promotional interest rate that may apply.

Tip # 4: Avoid new charges during the promotional period

To minimize interest costs, you should always focus on paying down your highest interest balances first and this may not be possible for cards that have been used for a balance transfer if you have made new purchases on the card. Remember that any new purchases will be subject to higher standard interest rates and any payments you make on your credit card are usually applied to the balance transfer amount first. This leaves the new purchase balances unpaid and accruing higher interest charges.

Tip # 5: Never exceed your credit limit and pay on time every time

The terms and conditions of most balance transfer offers allow the credit card company to revoke the promotional interest rate if you miss payments or exceed your credit card limit. This means you risk losing the benefit of the promotional interest rate on the transferred balance if you do not pay close attention to your payment obligations. Maintain a monthly budget and set payment reminders to keep your account in good standing. Late payments and exceeding the credit limit will also negatively affect your credit score. 

How OBSI can help

When consumers complain about balance transfers to OBSI, they often tell us that the information they received from their credit card issuer was misleading or inadequately disclosed the terms and conditions of the offer and that they paid more interest than they expected to.

During our investigation, we will assess whether the credit card issuer met its obligations when it provided the consumer with the offer and while the account was open. These obligations include: 

• Appropriate product disclosure: Did the issuer fully disclose all relevant information about the offer before the consumer accepted it?
• Correct interest charges: Did the issuer charge interest and fees in accordance with the terms and conditions of the credit card, including any promotional interest rates?
• Compliance with laws, regulations and agreements: Did the issuer comply with its obligations under the credit cardholder agreement and all applicable laws and regulations? 

If we find that the issuer has met its obligations, we will generally have no basis to recommend compensation. We will not consider or make recommendations about the amount of interest charged if it has been appropriately disclosed by the issuer and agreed to by the consumer. However, in cases where the issuer failed to properly disclose the details of the offer, correctly calculate fees and charges or comply with applicable laws and regulations or the cardholder agreement, we will usually make a recommendation to compensate the consumer for any financial harm they incurred.  

In some situations, the issuer may offer a goodwill gesture to settle a consumer dispute, even where we have found no basis to make a recommendation. These offers are at the discretion of the issuer.

Conclusion

While balance transfers typically offer the benefit of a temporary reduction in interest rates, it’s important to understand how they work and how interest will be charged. Not fully understanding the terms and conditions of the agreement can lead to misunderstandings with your credit card issuer, unexpected interest costs, negative impacts to your credit score and situations in which the benefits are lost.