Dear Penny: I Just Got a Balance Transfer Offer. Is It Too Good to Be True?

Dear R.,

Banks want you to pay attention to that dazzling low APR and ignore all the bank-speak.

Consider that credit card agreements average nearly 5,000 words. They require a reading level about two grades above that of the average American. Banks make a lot of money because most people will focus on the 1.9% introductory APR and ignore the other 5,000 words.

So I applaud your skepticism and urge you to look at any credit card offer through that “is this too good to be true?” lens.

With a balance transfer credit card, you transfer your debt from one or more cards onto a card with a low introductory rate, sometimes zero percent. Lots of people successfully use balance transfer cards to get out of debt faster and save on interest.

But by offering you a balance transfer card, your bank is trying to lure you away from your current card companies. You’re paying a lot of interest to those companies. Your bank wants the pleasure of charging you all that interest, and they’re willing to fight for it. So they give you a temporary low interest offer in hopes that you’ll still have debt when those nine months are up.

To determine whether you want to play this game, you’ll need to be on the lookout for a few things in all that banking mumbo-jumbo.

The first thing to look for is the fees. You’ll typically pay a fee of 3% to 5% of the amount you transfer. That means if the balances you’re transferring total $5,000 and you have a 3% fee, you’re starting with $5,150. Many balance transfer cards charge an annual fee on top of that.

Still, these are typically pretty straightforward. And considering that at the higher end, credit card APRs are often over 20%, you stand to save a lot of money on interest as long as the fees are reasonable.

Where banks really get sneaky is with all the APRs.

That 1.9% rate you mention probably only applies to the transferred balances. There’s probably a way higher APR that applies to any new purchases you charge to the card. 

Also look for the regular APR, i.e., the interest you’ll be charged once those nine months are over. Many people find that the regular APR on their balance transfer card is a couple points higher than the APRs on their existing cards.

Many agreements also state that the bank can cancel your promotional APR if you make late payments or miss them altogether.

Because of all the baiting and switching surrounding APRs, I suggest pursuing a balance transfer card only if you can budget enough each month to wipe out your debt completely during the promo period. You also need to solemnly swear that you will not make additional purchases on this card.

If you do decide to go this route, I recommend shopping around before you take up this offer. Nine months is a relatively short promo period — many cards offer between 12 and 21 months, and a longer low-interest period gives you more breathing room to nix this debt. Bonus points if you can qualify for a zero-interest promotion.

But if you know that you won’t be able to pay off your debt during the introductory period, a debt consolidation loan may be a better option. Sure, you’ll pay more than 1.9% interest, but you’ll get the simplicity of a fixed monthly payment and you won’t have to juggle multiple APRs.

Just remember that banks make a lot of money because people don’t know what they’re signing up for. Don’t be one of those people. Approach future credit cards and loans with the same scrutiny you’re bringing to this offer, and you’ll do just fine.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about credit cards to [email protected].