Ask Liz Weston

Balance transfer fees used to be a minor annoyance: typically less than 3% and generally capped at $50 to $75. Now they’re as high as 5% of the transferred balance, with no caps, and issuers may well continue to boost them in their never-ending quest for profits to replace what they lost to credit card reform.

Bill Hardekopf of LowCards.com recently did a round-up of current balance transfer fees by issuer, and here’s what he found:

Chase: 5%
Discover: 5%
Bank of America: 4%
Citi: 3%
American Express: 3%
Capital One: most do not have balance transfer fee, but the Platinum
Prestige card charges 3%

As before, you have to do the math to make sure a balance transfer makes sense, since the fees will offset and could outweigh any interest rate savings. Hardekopf advises that if you need longer than a year to pay off your debt, you should consider a card with a low on-going rate rather than one with an ultra-low teaser rate that will expire.

Hardekopf’s additional advice:

You must pay on time, every time. If you have a late payment, your
introductory period will likely end and you will be assessed the APR
on the transferred balance.

There is no grace period with balance transfers. Interest charges begin at
the time the check is issued to your credit card institution.

You can’t transfer your balance to another card with the same issuer.

It takes about four weeks for the balance to be transferred. Continue to
make all required payments until you confirm that the balance transfers were
made. Multiple balance transfers will process in the order they are
requested on the application.

The new issuer pays the amount of the balance directly to the old issuer
and the amount you owe them will be reduced by the amount you transferred.
The available credit on your new account will be reduced, as if you had made
a purchase.

Transferring a balance does not automatically close your old account. If
you want to close the account, contact the issuer directly.

Issuers have the right to decline balance transfer requests or transfer
less than you requested.

Dear Liz: I took advantage of a 4.99% fixed-rate balance transfer offer a couple of years ago. I just received a notice from the issuer that it was increasing my minimum payment from 2% to 5%. Clearly, I’m not profitable enough, and now it’s seeking to get rid of me fast! Suggestions?

Answer: Many borrowers who have low fixed rates will probably lose them or see their terms change in coming months as credit card issuers cope with higher defaults and new federal regulations.

You have several options, none of which you’ll like:

• You can pay off your balance at the new, faster rate, which will get you out of debt fairly quickly while preserving your current rate (unless your issuer changes its mind about that too).
• You can transfer your balance to another low-rate offer, which probably won’t be fixed and may not last very long.
• You can default on your debt if you can’t afford the payments, which would trash your credit.
• You can learn that carrying credit card balances always has been and always will be a sucker’s game.

Dear Liz: I have $175,000 in credit card debt. Almost all of this debt was due to balance transfer offers over the years which I managed quite well to make sure I had no balances with high interest rates. Now with credit being so tight, one of my issuers has reduced my credit limits and I can’t find any balance transfer offers to extend my low rates. Will the issuers allow me to settle this debt for less than I owe? I always get offers from credit consolidation companies that tell me banks are willing to accept 50% or less of your balance if you pay the reduced balance amount in full. Can I simply call up the credit card company and offer a reduced amount? If I cash out on my stocks and other investments, I could actually pay the debt off in full so I do have the ability to pay. I just never did so since the interest rates were so low.

Answer: The recession has made credit card issuers more willing to accept debt settlement offers, but your savings will come at your credit scores’ expense.

Card issuers really don’t like it when people don’t pay what they owe. When the notation of a debt settlement hits your credit reports, expect your scores to dive.

Some people have little choice but to accept this price. They can’t pay their debt and, for whatever reason, can’t wipe it out in bankruptcy court. In those cases, debt settlement can be the best of bad options.
You, however, have a choice. Don’t make one you’ll regret.

Dear Liz: Would it hurt our credit scores if my husband and I transfer credit card balances to interest-free cards? This would save us over $200 a month in interest. We’ve done this twice before but are concerned about hurting our scores.

Answer: Using balance transfer offers can dramatically reduce your interest costs. But this maneuver does have risks, with potential credit score damage just one of them.

Every time you open a new account, you risk a small ding to your credit score. Transferring a balance from a high-limit account to a lower-limit one can also cause your scores to drop. The damage can be temporary if you diligently pay down your balance, but many people who use low-rate balance transfer offers have gotten in the habit of moving their debt around rather than paying it off.

You need to know that the tune for this game of musical chairs may be about to end. Many credit card experts believe low-rate balance transfer offers will become much scarcer as we draw closer to the implementation date of the new credit card reform law in February 2010.

Indeed, most balance transfer offers are already less generous than they were a few years ago. Although people with excellent credit still get low-rate balance transfer deals, the low rates don’t last as long and are almost always accompanied by 3% to 4% balance transfer fees that are no longer capped.

By all means, take advantage of this offer if it makes financial sense. But don’t expect to be able to transfer your balance to another cheap deal once the no-interest time period expires. Use your low rate as an impetus to pay off this debt as quickly as possible, and resolve to stop playing credit card games by paying your balance in full every month.

Dear Liz: My credit card interest rate recently went from 11% to 24%. I have excellent credit and a history of paying off any balance. I have never missed a payment or paid late. When I asked why the rate was hiked, I was given a story about the issuer’s rising costs. Should I switch my balance to a card from my local bank? The balance is small and the interest rate is one-third of what my current credit card company is demanding. I can pay the balance off in four months.

Answer: The credit card issuers that are being the most aggressive about raising rates and cutting limits are hoping you’ll passively accept the changes. But when you have good credit, you have choices. You can take your business elsewhere.

If you can pay the balance off quickly, though, you might want to do the math on whether a switch makes sense. If you have to pay a 3% to 4% fee for the transfer, which you typically do, that cost may offset any interest rate savings. Plus, applying for a new card can ding your credit.

You might want to make the change anyway, of course, just to make the point to your issuer that you won’t stand for arbitrary rate increases.