Many consumers look to make a balance transfer in order to get a better interest rate on their existing credit card debt. What consumers don’t often realize is the impact of the balance transfer application of payments. Before selecting a new credit card for transferring a balance, consumers should ensure they understand the terms and agreements of the card which should disclose the breakdown of payments between a balance transfer and new purchases. Understanding what percentage rate a balance transfer will incur as well as what a new purchase rate might be is critical to ensuring you are managing your debt load as efficiently as possible.
What Applies and What Does Not
People who are looking to transfer a balance should look beyond just the introductory information if they wish to use the new card as their primary credit card. Many consumers do not realize that the 0% rate received on a transfer balance does not apply to new purchases. If you transferred $5000 to a new card with a 0% interest rate for transferred credit balances, it could have a rate upwards of 15% for new purchases.
If you made new purchases during a billing period totaling as little as $100, you will be paying interest on that $100 much longer than you think. This is because a credit card issuer typically applies monthly payments to the balance with the lower rate of interest first. Even if you pay an extra $100 beyond the minimum balance due on a monthly payment, this will still only be applied to the overall principal balance and not to your $100 in new purchases. The entire balance transfer amount would have to be paid before your payment will be applied to your recent purchases. The interest that will compound on this purchase could be extensive if you are not able to pay your balance off for a significant amount of time.
Knowing the Rules for What Balances Counts
Understanding whether you are looking for a balance transfer or balance consolidation is important before moving everything to a new card. The introductory rate may only be effective for the very first balance you transfer and not the additional card balances you transfer- even if you do it all at the same time. You know are potentially paying 0% on your first balance transfer and paying new purchase interest rates on the subsequent transfers. This can be particularly frustrating if your new overall rate is much more than what had been on your original credit cards.
Every credit card has a different set of criteria. If you are interested in finding one that will minimize the difference in the application of payments between balance transfers and new purchases, it is available but likely won’t have the super low interest rates of other offers. Make sure you take the time to evaluate your new card criteria before making your final selection. You should also determine ahead of time if the card is only intended for a one time balance transfer to take advantage of a low interest rate or if the card can be used for new purchases as well.
Sheryl Platte is a freelance writer based in the Seattle, WA area. With ten years of business and industry experience, Sheryl focuses her writing on strategy and consumer information writing.
