How banks use low rate offers to lock in high rates
by
Scott Bilker |
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Scott,
I have used the lower interest rate checks
from my credit card company to transfer debt. I noticed on my statement that the
balances on the original rate and the new rate are not getting paid down
proportionately. Can I get the company to apply my payment my way? Is the use of
these checks a benefit or a curse?
Mary
Mary,
It is wise to use low rate offers to
save money on your debt. You correctly used the offer to your
advantage however, the bank "tricked" you into locking in
your prior balance at a higher rate. Well, tricked may be too strong
because they do explain this in the fine print of their terms but,
nonetheless, it is mostly an unknown condition and, therefore,
effectively misleads the consumer into paying more when taking
advantage of low-rate transfer deals.
What
is happening is that your balance has been split between two interest
rates. The interest rate on your original balance and the low-rate
transfer offer. For example, let's say that you have a $5,000 credit
limit with $4,000 charged at 9.99%. You suddenly receive a low-rate,
0%, transfer offer on your remaining credit limit ($1,000) and
decide to use that money by transferring that $1,000 from another
high rate card (12%). After you're done with all the transfers, you owe
a total of $5,000, but $4,000 is at 9.99% and $1,000 is at 0%.
So here's my rhetorical question: How
will a $100 payment be applied to your account?
You would want all $100 to go toward
the 9.99% balance, but that is not how the bank is going to do it.
The bank is going to apply the $100 to the 0% balance. This makes
the
0%-balance $900 and locks the 9.99%-balance at $4,000. In other
words, the bank is going to apply your payment in its best interests
(no pun intended). That would be to pay everything to your low-rate
balances first and lock in the balance at the higher rate, which
creates more revenue for them!
You can avoid this catch-22 by using
a DebtSmart technique! That is simply to make sure that your balance
is $0 before taking advantage of the low-rate transfer.
Going back to that example. Let's say
that you had those two cards again. One with a $4,000 balance at
9.99% and another with a $1,000 balance at 12% APR. The low-rate
offer is on the card with the $4,000 balance. Your strategy is to
first transfer your balance from the 9.99% card to the 12% card (in
this example), making the balance $0 on the 9.99% card and $5,000 on
the 12% card.
The low-rate 0%-transfer offer is on
the 9.99% card, which now has a $0 balance. At this point you
transfer the entire $5,000 to the 0% (was 9.99%) card from the 12%
card. After completing these steps, your entire balance is at 0%. No
split balances.
Of course, your entire payment is
being applied to the 0% balance, but the $4,000 is not being charged
9.99%! That's how you beat them at their own game!
Regards,
Scott
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