Balance transfer credit cards have been popular ever since the first 0% APR offer. Customers quickly realized they could save a lot of money by transferring a balance from a high interest card to the new one with a low teaser rate. Lenders, however, have been finding ways to make these deals more profitable at the expense of consumers. The Credit CARD Act restricts some of the worst abuses, but it may also have an unintended consequence: interest rates on balance transfer credit cards are likely to increase while at the same time, introductory periods are expected to get shorter.
Payment Allocation
One of the biggest rules to impact balance transfer credit cards has to do with a little-known trick credit card issuers have been using to take advantage of unsuspecting customers. Known as negative payment hierarchy, the way the lender applies your payments is not always what you would expect.
For instance, let’s say you have a card with a 0% introductory rate on balance transfers, but a 9.99% APR on purchases. You transfer a $2500 balance and make $500 worth of purchases. Although most people weren’t aware of it, the bank could apply your entire payment to the transaction with the lowest interest rate, in this case the balance transfer. That meant the purchases you made would sit around, racking up interest until the balance transfer was paid in full.
The CARD Act prohibits this kind of scheme, however, which led many industry analysts to speculate that balance transfer credit cards would soon become a thing of the past. Instead, banks are increasing their offers of teaser rates but have recently hiked their balance transfer fees to negate any losses resulting from the ban.
Under the new rules, lenders are allowed to apply your minimum payment (usually 2% of the balance) to the transactions with the lower rate, but anything over the minimum payment must be applied to the higher interest charges. Using our example from above, on a $3000 balance, the minimum payment would be $60. If you paid $100 a month, $60 would go to pay down the balance transfer, and $40 would be applied to the purchases.
Inactivity Fees
In the past, some banks have charged customers inactivity fees for not using their cards. This led to many people canceling their old cards after switching to balance transfer credit cards. Under the new law, however, lenders aren’t allowed to charge inactivity fees. This means that people who take advantage of balance transfer offers can keep their old cards open, even if they’re not using them. This helps their credit rating because they have more available revolving credit.
One caveat to this rule, however: some card issuers are now charging fees when you don’t spend a certain dollar amount over the course of a year. Although it looks and feels very much like an inactivity fee, it skirts around the new rule enough to be legal.
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