May 28th, 2017

Credit Card Fine Print

Credit card debt hit a peak in early 2009 as the recession was getting into full swing and then took a pretty dramatic dip. While part of that dip can reasonably have been attributed to a change in attitude about carrying significant credit card debt, a large part of the dip was the result of write-offs by credit card companies.  According to a 2013 Federal Reserve Payments Study, the volume of credit card transactions was fairly flat from 2006 to 2009.  However, between 2009 and 2012, transactions increased an average of 6.8% per year.  Apparently the memories of overwhelming credit card debt were fairly short.

The fact of the matter is that credit cards are big business for financial institutions.  That’s why we are all inundated with enticing offers to move our credit card balances from one card to another in order to “save big money” on interest.  According to CardHub.com, the average length of those 0% introductory rate offers we’ve all seen hit a plateau in 2012 of 10 months, though it began to rise a bit in 2013.  On the surface of it, paying no interest for 10 months sounds like a pretty sweet deal.  But here are several reasons why it may not be as sweet as it sounds:

  • Most of the 0% offers we’ve seen out there are offset by a balance transfer FEE.  In other words, you’ll be charged 3% or more up front on the balances you transfer.
  • There are often many strings attached to balance-transfer offers.  For example, being late on a payment during the introductory period might cause you to forfeit the intro rate.
  • There may be other fees associated with the account, like an annual fee, late payment fees, etc.
  • Most importantly, if you don’t pay off the balances you transfer by the end of the introductory period, guess what? You could easily be paying a higher interest rate on an ongoing basis than you were with your old card.  If you are, indeed, disciplined enough to pay off your entire balance in 6 – 12 months without being late on a payment, then this could be a great deal for you.  But let’s just say you transfer $3,500 – just half of the typical household’s credit card debt.  And let’s say you had a full 12 months on the introductory 0% offer.  You’d have to pay nearly $300 per month.  Can you swing that?

Handled wisely, credit cards are a convenient and useful source of funds for consumers.  When it comes to credit card offers, just be sure to read beyond that headline that promises to save you a lot of money with that 0% introductory rate and be sure you are going to save over the long haul.

Category: Understanding Credit

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