Reading the Fine Print in those Low-Rate Credit Card Offers

by Scott Bilker

Taking advantage of low-rate offers is almost always a good idea. That’s where the bulk of interest savings are found when you’re managing your debt. However, there may be hidden costs that need to be uncovered before deciding to accept a seemingly good deal. It is imperative that you read through and understand the entire low-rate offer. That includes the letter, the back of the letter, and every bit of the fine print.

You want to talk about the details you can expect to find in those low-rate credit card offers letters. The conditions that you need to consider to ensure you’re going to get the better end of this offer. They are the details I always look at and note before jumping into any credit offer.

First: The most important factor is the interest rate, which can usually be found in big bold letters on the envelope in which the offer was received. This should make it stand out from most of the usual junk that fills the mailbox. The best offers will probably be found with your existing creditors. They may be trying to encourage you to do some business with them or attempting to get you to transfer your balance from another credit card.

In order to save money with a balance transfer, you must be sure you are switching from a rate that is currently higher than the new offer. There are, of course, other considerations to keep in mind that we’ll be discussing soon, but in general, if this condition is not true, you won’t be able to save any money.

Second: What I call the time-to-act date. This is the latest day you can take advantage of the offer. I’ve noticed lately that there can be other conditions related to this date. Specifically, different rates for different acting dates. For example, “if you act by 3/5/04 the rate is 8.9%, if you wait until 3/20/04 the rate is 9.9%, and finally by 4/5/04 the rate is 10.9%.”

Third: Length of time the new low rate will be applied to your account. This time can vary from three months to a year and can make a big difference in how much you save. The longer the time you’re in the new lower rate, the more money you save. That’s obvious, but there is certainly a break-even time when compared to your current rate. In other words, if fees are included as a condition of the transfers, you’ll have to be in the lower rate for a certain amount of time before you start seeing any savings.

Fourth: How the payments are applied. If you have an existing balance on the credit line in which you’re getting the new offer, you have to be careful of how payments get applied to your account. For example, you may have purchases at 14.9% in the amount of $1,000. The new offer is for 6.9%, but your payments will be applied to your last transaction. This means that if you transfer $2,000 at 6.9% and make a payment of $100, the entire $100 is applied to the 6.9% transfer amount. This is great for the bank since your balance of $1,000 still has interest accruing at 14.9% until you are finished paying back the transfer amount.

Fifth: The amount you’re allowed to transfer. This one can be tricky. Most offers allow you to “transfer up to your credit limit” which is fine. That’s the best option. However, they often don’t specify exactly how much you can transfer. It’s tricky because you might go over your credit limit when you include fees and interest charges. For example, you have a $2,000 credit line and an offer to transfer balances at 5.9%. There’s a 2% transfer fee and no grace period on balance transfers. What happens when you transfer $2,000?

Well the 2% transfer fee is $40 bringing the total to $2,040. Then one month of interest on the new balance at 5.9% is $10, which brings the balance to $2,050. Oops, over the limit, now you’re getting hit with a $25 over-limit fee bringing the total to $2,075. So, when the smoke clears, you paid $75 in fees for one month on a $2,000 balance—that’s equivalent to an APR of 45%!

This is a topic you may need to discuss with an account rep to make sure you don’t break any rules. If you go over your limit, you will be hit with a penalty. Here’s Scott’s rule on penalties and fees, “If the bank can charge you a fee—it will.”

Sixth: Fees that may be imposed on the balance transfer. I think you’ll find that most balance transfer offers will not impose any transfer fees. To make sure, you must read carefully or it can cost you big-time. There are, however, times you will be forced to pay a transfer fee, which is based on the amount transferred, if you want to get the low rate. This fee can be very high. It is usually based on either: (1) some minimum amount like $2 no matter the amount of the transfer, (2) 2% of the amount transferred, or (3) a maximum charge (ceiling)—like $20. But there are some banks that have no ceiling on the amount of the fee. So if you transfer $7,000 with a 2% fee, the total fee comes out to $140. It may still be worthwhile to use an offer like this, but you must know if, when compared to what you’re currently paying, you’re saving money.

Seventh: Is there a grace period for transfers? A grace period is a set amount of time in which your account balance will not be charged interest. It is very rare indeed to get a low-rate that doesn’t charge you money when you transfer your balance. It does happen sometimes, and that can be a great bonus! On one occasion I was able to transfer $5,000 from 8.9% to 3.9% and was allowed a one-month interest-free period on that transfer. The instant savings amounted to $37 because that’s what it would have cost to leave it at 8.9% for the month. Not to worry if there is no grace period because it is only fair that interest is charged from the instant you take the loan. This is, after all, how mortgages work.

Eighth: Late payment conditions. This is where you must be extremely careful. Your low-rate offer could evaporate into thin air and end up costing you hundreds of extra dollars if you do not meticulously read all of the conditions. This condition is always in the real superfine print and usually goes something like, “However, if a minimum monthly payment is not received by the close of the first full billing cycle following its Payment Due Date, your promotional APR balances will be 24.9%.” That’s a big increase from the 3.9% in the offer, and that’s just for being late once! The bottom line here is that if you do decide to take advantage of the offer, you must be vigilant at making sure your payments are on time.

Ninth: How is the transfer to be conducted? There are three popular methods: (1) a fill-in-the-blank transfer sheet you return to the bank with their business reply envelope, (2) balance-transfer checks, and (3) call the bank. I have seen cases where there are transfer fees imposed when you use the balance-transfer checks. However, if you call and ask about that fee, you may find that it is waived completely if you do the transfer by phone with an account representative. Obviously, the no-fee choice is superior. Again, these details should be in your letter, on the back of the letter, or included on the checks themselves. It may not state that it’s free if you call and transfer balances by phone. So if there is a fee imposed, call and find out if it can be waived.

Tenth: Different rates for different amounts transferred. This type of information might be found in the large-print section of the letter but then again, maybe not. It works like this—the more you transfer the lower the rate. For example, “0 to $2,999 is at 8.9%, $3,000 to $4,999 is at 7.9%, over $5,000 is at 6.9%.” This is very important in calculating how much you can save. Obviously, the lower the rate the better.

Eleventh: Any annual fees? If the low-rate offer is conditional on your applying for a new line of credit, you’ll need to consider the cost of the account itself. Again, it may turn out that even if there is an annual fee, you may be better off with the new card. Annual fees can run very high, maybe as much as $50, so make sure that it is clearly stated whether or not there is an annual fee and if so, its amount.

Twelfth: What the rate will go to when the promotion is over. Hopefully, for the bank’s sake, they’re going to raise the rate to a fair level, but I’ve seen offers that end with rates going to near 20%! That’s just too high for me and it’s too high for you. You need to know the rate when the promotion ends to more accurately calculate how much your savings will total. That is, assuming that you’re not going to switch to a new offer. What happens in reality is that before the time runs out for one promotion, you’ll have many others to choose from—that’s why I say, “for the bank’s sake” because you’ll be gone if they try to gouge you.

Let’s look at an example and see if a balance transfer is worth doing. Here’s the situation. You currently owe $2,000 to a credit card with an 11.9% APR. You’re paying $100 per month toward that debt which, at that rate, will be paid off in 23 months (1 year, 11 months) and cost a total of $2,240.35.

There are two balance transfer options available to consider:

Option 1: Interest rate is 3.9% APR for one year, then it jumps to 9.9% for the next year. There is a 3% cash advance fee for transfers and a $50 annual fee.

Option 2: Interest rate is 4.9% APR for 6 months, then it jumps to 10.9% and there’s an annual fee of $15.

Option 3: Don’t forget, you can do nothing and stay at 11.9%.

Which of your three options is better?

It turns out that option 1 actually costs more than doing nothing! After the loan is repaid, this option ends up costing $2,271.81, which is $31.46 over the repayment amount if you don’t do the transfer in the first place. Notice how enticing it sounds though—3.9% for one year. That’s why you have to do the math! As it turns out, the true APR for this offer is 13.22%.

Looking at option 2, the total repaid is $2,188.29! Now that’s an offer worth doing a transfer on because it’s $52.06 better than staying at the 11.9%, not to mention $83.52 better than option 1. The true APR for option 2 is 9.61%, clearly the winner. I’ll be talking about how to figure out those numbers in future articles. A nice exercise would be for you to give that a try and see how you do.

Anyway, there are those who would say, “Scott, that’s a lot of work for only $52.06. You gotta make all those comparisons, fill out paperwork, etc. It’s not worth it.” Well, for those people who don’t feel it’s worth saving 52 bucks, please write me a check in that amount today since it’s not much. I doubt I’ll have any takers.

The trick to these offers is the fancy way the numbers are presented. For example, say you’re at a department store and there’s a sale with an offer of, “take 25% off retail and then take another 25% off!” Sounds almost like taking 50%-right? Let’s see, if an item is $100 then the first 25% off brings the price to $75, but the next 25% is based on $75 which is $18.75 so the total price becomes $56.25. The real discount total is 43.75%.

Lastly, since the marketing of these promotions is always changing, you have to stay on top of all your offers and read all new offers very carefully. In the end, it’s your responsibility to get the best deal—caveat emptor.