2014 balance transfer survey: Beware combo deals, two-tier fees

CreditCards.com

Consumers shopping for credit card balance transfers can find plenty of good deals this year, but may also encounter new tweaks that can turn these money-saving offers into financial burdens, the 2014 CreditCards.com annual balance transfer survey shows.

Most notably, the 2014 CreditCards.com annual survey of 35 top balance transfer cards shows "combo offers" have become the norm. These offers, found in 32 of the 35 cards, not only allow balance transfers at 0 percent, they let borrowers charge new purchases interest-free, too. That can entice cardholders to rack up, rather than pay down, debt.

"The bank's betting that you're not going be able to pay it off on time or that you're going to start spending again," says  Joe Valenti, director of asset building for the Center for American Progress, who researches credit cards.

The survey also found:

  • Longest intro periods vanish. The extremely long 0-percent introductory periods that were available a few years ago no longer exist: Card issuers have cut back introductory periods for the second straight year. The longest intro period this year was 18 months, down from the 21 months offered by several issuers in 2012. That's bad news for consumers who need extra time to pay off a big balance.
  • However, the shortest intro periods are now longer. Card issuers have gotten more generous on the opposite end, increasing the duration of the shortest introductory periods by three months. The briefest introductory period offered this year was nine months, up from the six months offered by five cards last year.
  • Two-tier fees ratchet up after intro period. A 3-percent balance transfer fee remains the norm, but consumers need to watch out for a new trend. More issuers now offer one balance transfer fee during the introductory period, then switch to a higher one. This year, one card offered a $0 fee for 60 days, then 3 percent. Eleven cards charged 3 percent, then 4 percent later. And three cards charged 3 percent, then hiked the fee to 5 percent after the promotional period.

CreditCards.com has surveyed a representative sampling of balance transfer deals from big issuers since 2010. This year's sample includes nearly all the same balance transfer cards as last year. In the few cases where a card was no longer offered or no longer had introductory pricing, we included a similar card, from the same issuer if possible.

The survey helps consumers compare a feature of credit cards that, used wisely, lets them buy time to pay down debt at a lower cost. The offers dwindled during the recession, then roared back after. "Balance transfer offers were on the rise in the first couple of years post-recession, and they've stayed constant since then," says Lisa Hronek, a credit card industry analyst for Mintel. "The industry has found something that's working."

These offers work well for some consumers, too. Experts say they can be a good way to get relief from a high interest rate and pay down a balance quickly. Balance transfers aren't for everyone, though, says Valenti. In a worst-case scenario, a balance transfer can backfire and a consumer who was struggling can wind up even deeper in debt, he says."Balance transfers work really well for some people, but can be hit or miss for a lot of others."

That can be especially true of the combo offers, Valenti says. They can be a double-edged sword because, if you're looking at a balance transfer offer, you likely already have credit card debt that concerns you. So what happens when you add an incentive to purchase more on plastic? "That makes it very easy to rack up more of a balance on the new card," he says.

Common offer: 1 year, 0 percent
Consumers who want to take advantage of the current spate of balance transfer offers have plenty of choices. (See chart below for a sampling of balance transfer offers.) All but a few of the cards surveyed offered 0-percent introductory balance transfer rates.

"About nine out of 10 consumers who get an offer with balance transfer pricing will see a 0-percent rate," Hronek says.

This year, the most common duration for 0-percent introductory offers was a year -- three months shorter than last year's 15 months.

One other change: While our 2013 balance transfer survey saw the demise of the hefty 5 percent balance transfer fee, one issuer revived it this year, in time-delayed form. Three Wells Fargo cards charge an introductory balance transfer fee of 3 percent, then hike it by 2 percent for balances transferred after the introductory period.

However, the standard balance transfer fee has stayed the same as 2013 -- 3 percent. Of the 35 cards surveyed, 17 cards charged 3 percent, while another 10 charged that amount during an introductory period, then increased the fee later.

The survey found only one card, Slate from Chase, that offered both a 0-percent introductory balance transfer interest rate and an introductory $0 balance transfer fee.

The senior research director at CEB TowerGroup, Brian Riley, says card issuers can afford to dangle attractive deals in front of consumers now due to low interest rates, but that might not last for long. "This could die a quick death if rates go up," Riley says.

While no one can predict exactly what will happen with interest rates, they could begin to edge up in 2014. Since the recession hit in 2008, the Federal Reserve has tamped down the interest rate at which banks lend money to each other, and that has kept the prime rate low. Most U.S. credit cards are variable rate cards tied to the prime, so an interest rate hike by the Fed would have a big impact.

The Fed has sworn to keep hands off rates until unemployment dips below 6.5 percent, which economists don't expect until after midyear 2014. A consumer considering a balance transfer might want to act sooner rather than later, Riley says: "If you're on the fence, now's a good time to take a look rather than six months from now."

Tips for using balance transfers
If you shop for the best deal, plan your payments and use restraint in charging new purchases to get the most out of a balance transfer deal, experts say. Here are four steps to make a balance transfer work in your favor:

1. Consider your credit. Not everyone can qualify for an attractive balance transfer offer, Riley says. If you have a FICO score above 700, you should be able to get a good deal, Riley says. Your chances decrease as your credit score does. "Once you get below the 620 range, your chance of getting a good balance transfer offer is very limited," he says. Consumers with lower scores, if they can get approved, might be less likely to get a high enough credit limit to transfer their full balances, he says.

2. Do some comparison shopping. Some consumers see 0 percent for a certain length of time and look no further. That's a mistake. "You have to look at the terms of the offer as a whole," Riley says. For example, compare:

  • The post-introductory balance transfer interest rate. Unless you're 100 percent sure you'll pay off your entire balance while you still have 0 percent, you need to consider this interest rate, Valenti says. While the go-to rate typically varies based on creditworthiness, looking at the range can help, Riley says. Some issuers have a wide range of possible interest rates, and it can be hard to know which one you'll get. Unless you have stellar credit, it might be wise to pick an issuer that has a narrower spread of possible rates, Riley says.
  • The value of other sign-up perks. Some cards offer additional perks to sweeten the deal. For example, Riley says some rewards cards with introductory balance transfer rates also offer sign-up bonuses of points or miles that can be worth $500 or more if you meet a certain spending requirement in a certain time frame. He says: "Some issuers are very generous."
  • Other costs of the credit. "Look at the whole cost of managing the card," Riley says. One example: Is there an annual fee? Of the 35 cards surveyed by CreditCards.com, only five had an annual fee, ranging from $25 (waived the first year) for the PenFed Visa Platinum Cash Rewards Card to a $495 annual fee, plus $195 for each authorized user, for the Visa Black card.

2. Figure out if you can pay off your debt on time. One big question to ask: will you be able to pay off your debt during the introductory period? It's important to look at your household budget, figure out how much you can devote to repayment and see if it's enough to knock out your debt, Valenti says.

3. Stop spending on plastic. A major pitfall of balance transfers: your old card is suddenly empty, and it can be tempting to spend. To eliminate that possibility, Riley recommends closing your old account, despite the hit your FICO score would take due to the reduction in available credit. How about just cutting up the card or hiding it? "People promise themselves they will keep the old card in the junk drawer and not use it, but you often don't see that play out successfully," he says.

4. Follow the rules to the letter. Read through the terms of your offer carefully and make sure you follow them, experts say. If you fall behind on payments or break another rule, you could get your 0 percent yanked and replaced with a penalty interest rate that could make you worse off than you were before the transfer. "Penalty APRs are still hovering at pretty astronomical rates in the 28 percent rage," Riley says.

See related: 2013 survey of balance transfer offers
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