해외자료 Beware Of Teaser Rates On Card Shifts_Investor's Business Daily_Friday May 27

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Friday May 27, 7:00 pm ET
Paul Katzeff

Looking for a cheaper credit card?

Issuers offer low or no interest rates if you switch to their cards.

But these low-rate offers often have traps. You won't know them unless you read the fine print in the issuer's agreement. Break any of the rules, and you can incur costly fees and penalties. You can even lose your low interest rate and get hit with a sharply higher new rate.

Consumers should watch for several pitfalls when they consider these cards, says Laura Washington, associate editor of Consumer Reports Money Adviser.

"First, these are only temporary, teaser rates," she said. "There are time limits. Those are typically six months to a year, or for the lifetime of the balance transfer."

Once the time limit passes, your balance is subject to new, higher rates. You may also be hit with fees.

"So if you transfer a balance from one card to another, have a plan for paying off the debt," Washington said. "If you don't, you'll pay an astronomical rate when the teaser period ends based on current trends."

The second pitfall to watch for: a fee to transfer a balance. Issuers assess that fee even if the interest rate on late payments is zero.

The typical fee is $35 or 3% of the transfer balance, says Washington. Fees can be as small as $5. But they go as high as $75.

Third, the teaser rate almost always applies only to the balance you transfer.

If you rack up new transactions on the same new card, they'll be hit with a rate likely to be much higher.

Rates as high as 30% exist, says Greg McBride, senior financial analyst for Bankrate.com.

Know The Rules

Don't fall into the trap of thinking you can make payments on the higher-rate new transactions first. Your credit card company may simply ignore you if you tell it to apply your payment to new buys instead of the balance transfer.

"The card issuer follows its own rules," McBride said. "And its rules may say that it will apply your payments to the lowest rate first."

Say you have a $1,000 balance on Card A.

Card A charges 13% on late payments. So you transfer the $1,000 to Card B, which offers you a zero interest rate for nine months. Soon you buy a new dishwasher for $400. The credit-card agreement fine print says your interest on overdue new purchases will be 22%.

So when your statement comes, you cut a check for $400 and write on it, "Apply to dishwasher purchase."

But when your next month's bill arrives, you'll find that your card issuer applied your $400 to the $1,000 balance transfer.

Now that amount is only $600.

And they've charged you interest and a late fee on your new dishwasher.

"Meanwhile, that new amount keeps growing, building interest," McBride said. "You can't pay it off until you pay off the entire old balance transfer."

This rule can cause other trouble. Some card issuers require you to make minimum monthly purchases.

That's like forcing the mythological Sisyphus to push a bigger rock uphill.

You're compelled to make new buys. But you're barred from paying those off until you've paid off lower-cost debt first.

"Always ask a card issuer if it has these rules," Washington said. "And ask if you can read the agreement before taking the card."

The fourth pitfall to beware of: You can lose your low rate on the transfer if you're late with a payment to any creditor, even one other than your credit card issuer.

"That's called a universal default clause," McBride said. "Look for it in the fine print of your card agreement. It says the card issuer can replace your low or zero interest rate with another one, which will be much higher."

Paying Down Debt

The clause will probably also say it can do that if you're late with a payment to that credit card issuer or another one, any other lender -- or had a payment check returned because your account is overdrawn.

The fifth pitfall to check for before agreeing to a balance-transfer card is whether you'll be required to make monthly payments of at least a certain amount.

If so, minimum monthly payments are usually set as a percentage of your outstanding balance, plus late fees and catch-up payments from prior months.

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