If you've noticed a fresh spate of 0 percent balance transfer offers in your mailbox lately, you're not alone, say industry analysts and consumer watchdog groups. However, the latest offers come with some new terms and conditions that could trip up unsuspecting consumers.
The number of 0 percent promotional balance transfer offers being sent to consumers is on the rise. The growth defies recession-era predictions that 0 percent balance transfer offers, which once flooded consumers' mailboxes, were headed toward extinct.
"Toward the end of 2010 and 2011, we've seen a comeback in the economy, a comeback in consumer confidence," says Robert Hammer, president and CEO of R.K. Hammer Investment Bankers in Thousand Oaks, Calif. The rise in better deals for promotional balance transfer offers, in turn, "is an example of marketing that couldn't take place before ... Now that the times are better, the pendulum has swung back."
But it's not all good news. CreditCards.com's survey of 38 cards offering introductory balance transfer offers revealed that many banks have increased the fees associated with the balance transfers and removed caps that limited those fees. That means that the 0 percent balance transfer deals may not be quite as sweet as they appear.
The way it was
At the peak of the credit crunch in 2008, many analysts warned that a crisis in credit cards was on its way and that low interest and 0 percent balance transfer offers would be one of its first casualties. By 2009, experts' predictions had partially come true. The overall number of introductory balance transfer offers flooding consumers' mailboxes did decline, along with most credit card mailings, as a result of tighter credit and uncertainty over financial legislation that eventually became the Credit CARD Act of 2009, say experts. However, predictions that 0 percent balance transfer offers were doomed turned out to be overstated.
Experts agree that the offers never disappeared; they just changed shape for a while. Rather than remove promotional balance transfer offers completely, experts say that many banks temporarily replaced 0 percent balance transfer offers with low rate introductory offers -- typically 3.9 to 4.9 percent -- or reduced the number of months that the introductory rate applied. Then, once the economy began to slowly recover, and lingering uncertainty from the CARD Act cleared away, banks steadily resweetened their offers.
A new era: Higher fees, fewer caps
Although cardholders are seeing more promotional balance transfer offers in their inboxes, most cardholders aren't seeing the kind of low-fee, long-lasting, inexpensive offers that they saw before the recession. Instead, the terms of this year's post-recession 0 percent or low APR balance transfer offers are noticeably different.
Cards dangling 0 percent balance transfers deals for six to 12 months -- a standard feature of promotional offers before the recession -- remain common, but the balance transfer fees for many of these cards are also higher than they were before 2008. Then, the standard rate was just 3 percent or less. Now, 4 percent or even 5 percent are common, making transfers more costly. For example, a consumer who transfers a $5,000 balance to a card with a 4percent balance transfer fee and no cap would pay a $200 fee. Moreover, fewer of today's cards feature caps on fees. (See chart below for more information.)
Among our findings from our survey of the 38 credit cards we track that feature a promotional balance transfer offer:
- Fifteen of the 38 cards with balance transfer offers that CreditCards.com tracks have fees that are 3 percent or less of the transferred amount; 14 cards charge 4 percent and nine cards charge 5 percent.
- Some cards offer consumers a lower fee -- usually, 3 percent -- for as long as the promotional APR is available.
- The only card we saw that offered a promotional balance transfer rate without a fee: the Pentagon Federal Credit Union Promise Visa, which offers a no-fee 7.49 percent introductory APR for a whopping 36 months.
- The Citi Platinum Select MasterCard offers a 0 percent APR on balance transfers for 21 months.
- Card issuers are dangling more than one type of balance transfer offer, making comparison shopping important. Discover's More card also offers a 0 percent APR on balance transfers for 24 months -- the longest period we saw. The promotion only runs until the end of February, and the card’s balance transfer fee is a sky-high 5 percent -- without a cap. Don't like that offer? Discover has another More card whose balance transfer 0 percent intro rate lasts only 12 months -- but it has no fee at all, if you act by the offer's end date of Feb. 28.
Experts such as Andrew Davidson, a senior vice president at Mintel Comperemedia, say that a key rule enforced by the Credit CARD Act of 2009 contributed heavily to the emergence of today's higher fees for balance transfers. The federal rule requires issuers to apply a cardholder's credit card payments above their required minimum payment amount to the portion of their balance with the highest APR -- giving consumers who use their new cards for purchases more time to pay off their 0 percent balance transfers without accumulating extra interest.
"The new Fed rule on payment allocation turned the balance transfer model on its head," says Davidson. "Some speculated that it would be impossible to offer introductory APRs given the new rule."
Here, Davidson is referring to a common industry practice that gave card issuers a steady source of revenue before the new law was implemented. Prior to the CARD Act, many card issuers applied credit card payments to balance transfers with introductory offers first. So when cardholders made new purchases on the card, they often accumulated high interest payments because their monthly payments were going to their low interest balance transfers rather than to their newest purchases.
Cardholders often complained that they didn't realize that this was going on until it was too late, leading consumer groups to applaud when the CARD Act put a stop to the common practice. The law requires payment amounts above the minimum be applied to the portion of the balance with the highest rate. However, banks complained that the new rule severely inhibited their ability to turn a profit at a time when they were already feeling squeezed.
For balance transfer fees, "The industry standard used to be 3 percent of the check, but now, many cards charge 4 percent or 5 percent to compensate for the payment allocation rule," says Davidson. CreditCards.com data backs that assertion, showing that 23 of the 38 balance transfer cards we track had fees of 4 percent or higher.
Responding to an e-mail requesting comment on the bank's current balance transfer offers, Chase's spokeswoman, Linda Westermann, made a similar assertion to Davidson. "Our pricing/offers reflect the current business environment," says Westermann. "Our intent is to continue to provide credit to as many customers as possible and keep credit flowing."
Banks using loopholes, consumer groups say
Although some issuers say that restrictions in the CARD Act are a considerable handicap, Nick Bourke, director of the Safe Credit Cards Project at Pew Charitable Trust, says that banks can still make money off of the small loophole in the law that allows issuers to apply a consumer's minimum payment to the lowest rate balance. Bourke is the co-author of a report released in July 2010 that found that most banks are taking advantage of the provision. "Credit card companies are generally taking advantage of this exception so that they can maximize interest rate charges on cash advances and other high-rate balances," says Bourke. This loophole is bad news for consumers who may not realize that when they pay off the full amount of a purchase on a card with a promotional balance transfer offer, they could still wind up accumulating interest. Bourke recommends that consumers take advantage of the CARD Act's protections by paying as much as possible on any balance.
Banks find others ways to keep revenue flowing, as well. For example, many eliminated caps on balance transfer fees completely. Prior to 2008, the majority of banks featured a $50-$75 cap on balance transfer fees, according to previous reports by CreditCards.com, which ensured that consumers transferring over high balances wouldn't be caught off guard by higher fees. However, as banks began to feel doubly squeezed by the credit crunch and by pressure from the CARD Act, they reacted by making major changes in their card offers, including in their promotional balance transfer offers, say experts.
Peter Garuccio, a spokesman for the American Bankers Association, noted when referring to overall changes in balance transfer offers that banks made in 2009, "You had both legislative and economic pressure on the industry -- so much so that the business model had to change." Capping fees, in turn, was a tool that banks used before the recession to compete with one another. However, as Garuccio noted, some issuers "might not have that flexibility anymore.
Regardless of banks' motives, most cardholders can now expect that the majority of balance transfer offers arriving in their mailbox will not feature a fee cap. According to CreditCards.com data, only 5 of 38 cards featuring a promotional balance transfer offer also feature a cap on fees. The Pew report in July found even starker numbers -- saying that only 1 percent of credit cards issued by the 12 largest American banks currently feature a cap on balance transfer fees.
What's next: Better cards -- for some
Some experts say that consumers may see a return to lower fees and caps on balance transfers once banks begin competing more aggressively for new customers. However, Hammer says that this will also depend largely on consumer reaction. If enough cardholders turn up their noses at balance transfer offers with high fees and no caps on fees, banks will re-evaluate their pricing strategies. It's too soon to tell which way banks will go, says Hammer.
Davidson with Mintel Comperemedia says that consumers can expect sweeter balance transfer deals in the future -- such as longer promotional periods, coupled with better cards overall that don't feature annual fees or excessively high interest rates, which some experts feared would be a hallmark of post-recession, post-CARD Act cards. "Offers for cards these days come loaded with rewards, features and benefits, and we are, arguably, seeing some of the best offers we've ever seen -- 5 percent cash back, double rewards, additional discounts online, 0 percent teaser rates for longer and longer periods and most carry no annual fee," says Davidson. "Furthermore, [today's cards] now have the additional protections mandated by the CARD Act."
As for consumers who worry about this year's higher fees, Linda Sherry, a spokewoman for the consumer advocacy group Consumer Action, provides some advice: "I suggest [that cardholders] look for balance transfer offers that don't even charge a balance transfer fee. Sometimes, new cardholders receive such offers, or sometimes you can do it when you open a new card and avoid a balance transfer fee."
And don't forget that any card with a balance transfer offer can still come with a number of possible traps. If you're paying interest on a balance transfer, there is no grace period and interest accrues immediately, as it does with cash advances, says Sherry. "Just because you ask for an amount to be transferred from another card, the new issuer might take only part of it, leaving some on your old card, so check in regularly and open all bills, because you don't want to miss a payment because you assume you transferred a balance."
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