Changes are coming to balance transfer credit cards

Three simple ways to pay off credit card debt
Three simple ways to pay off credit card debt

Credit card debt is soaring. So is the number of consumers looking for balance transfer cards.

Think there's a connection? You can bet your 0% interest rate on it.

Due to a combination of factors, those 0% rate windows are likely to get shorter and cards may become more scarce this year, even as demand for the cards grow.

"There's been a steady increase over past couple years of people looking for balance transfer cards," says Robert Harrow, credit card analyst at Value Penguin. "It tracks pretty well with revolving debt."

Related: Is a travel reward card worth it?

Balance transfer cards, which offer a 0% interest rate on transfers of debt from another card during a window of time, are used by cardholders who carry hefty balances on high-interest credit cards.

By paying off the high-interest card with the balance transfer card that has a 0% interest rate, cardholders start the clock on aggressively paying off their debt during the interest-free window. These periods can last from 9 months up to 21 months.

The cards can save users thousands of dollars in interest rates.

But several forces are coming together to make the terms of balance transfer cards less favorable for consumers, says Harrow. He points to the likelihood of rising interest rates in the coming year, decreasing profitability from balance transfer cards for banks, and an increasing number of cardholders "gaming" the high-end rewards cards by using balance transfer cards to pay off their debts and then never using the balance transfer card again.

"These will lead to shorter 0% periods on balance transfer cards, less breathing room, giving people less time to pay off their debt," says Harrow.

In a Citi earnings call in January, John Gerspach, the chief financial officer, reported that the company is facing "headwinds" from cardholders who don't carry a balance. They may spend big to earn bonus points on reward cards, then transfer a remaining balance to card with 0% interest and pay it off in the 0% interest window.

Credit card companies don't make as much money from customers that pay off their debt during the promotional window. They're betting that you won't make the deadline and that your old debt will then earn them money as the card resets to a much higher rate.

Gerspach said on the call that in order to stabilize as they move into a "rising rate environment," their actions will include "shortening or eliminating the promotional period on certain offers."

So should you rush out and get into a balance transfer card before the promotional windows close?

Calm down, says Harrow.

"I would never tell anyone to rush in," he says. "But people who carry credit card debt should look at whether it makes sense for you now and how long it will take to pay off this debt."

Here are a few things to keep in mind when picking out a balance transfer card.

Balance transfer fees

Typically balance transfer cards charge a fee for the benefit of a promotional interest rate. The fees can usually range from 3% to 5% of the amount you transfer. You can look for a card that has no balance transfer fees. Also, you won't be doing yourself any favors by going with a card that charges an annual fee.

Balance transfer APR vs. Purchase APR

You found a card with a 0% interest rate on the balance you transferred, so you're good to use that card for other purchases and not pay any interest right?

Not so fast.

Many cards with promotional interest rates for balance transfers, maintain a more typical interest rate for new purchases made on that card. You'll need to look for the cards that do offer a 0% promotional rate on balance transfers for a set time and also 0%, for a time, on new purchases.

Balance transfers and your credit score

Usually balance transfer cards are offered to people with good credit. Using one card to pay off another will not ding your credit, but if you're not paying attention your credit could still take a hit.

If you're combining balances from several cards onto a single card, you may adversely affect a measure of your credit called credit utilization, which is how much of your available credit you use. As a general rule, you should use no more than 30% of your available credit. If you put several big balances on a single card you may push pass that guideline, which may bring your credit score down.

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