By BankingMyWay Staff

Shifting balances from high-interest credit cards to a low-interest credit card has long been a smart way to avoid exorbitant finance charges. In the current lending environment, however, such balance transfers are now going to cost you.

Shifting balances from high-interest credit cards to a low-interest credit card has long been a smart way to avoid exorbitant finance charges. In the current lending environment, however, such balance transfers are now going to cost you.

In the past, consumers had become accustomed to making free balance transfers to low-interest credit cards in order to consolidate debt. This set-up was a win-win situation because lenders could use low introductory interest rates to attract new customers, and new customers could save money. Unfortunately, the ongoing credit crisis has made credit more expensive across the board.

It is still possible for well-qualified consumers to find low-interest credit cards. The Credit Card Section of BankingMyWay.com shows several cards offering 0% APR on balance transfers for up to 12 months.  It’s the cost of transferring balances that has risen. Currently, most credit card companies are charging around 3% of the balance transferred. 

For example, the Discover® More Card offers 0% APR on balance transfers for 12 months and purchases for 6 months to borrowers with excellent credit but charges 3% of the transferred amount for each transfer made according to its terms and conditions. Similarly, The Citi® Platinum Select® MasterCard® offers 0% APR for both balance transfers and purchases for up to 12 months to well-qualified borrowers but also charges a 3% fee on each balance transfer (with a $5 minimum).

Balance transfer fees are not a new concept, but in the past they were often capped at around $75. Today’s fees are not capped. For example, a balance transfer of 15,000 would cost $450 in fees. Those considering making the a balance transfer need to consider if the amount they save in interest charges will outweigh the amount they pay in balance transfer fees.

Additionally, borrowers also have to consider a card’s interest rate once the introductory period is over. The 0% introductory APR on the Discover® More Card will convert to an APR of at least 10.99% but that rate is variable and may move up to a maximum of 29.99%. In the past, the 0% APR applied to balance transfers often remained until the transfer was repaid. That is no longer the case. Now, the standard purchase APR is applied to the remaining balance of a balance transfer when the introductory period expires.

Unless the borrower can pay off the balance transfer within the introductory period, balance transfers may not be worth it. Consider this example: a borrower owes $15,000 on a credit card with an18% interest rate. By transferring the balance to a 12-month 0% APR credit card, the borrower will save $2,250 in interest during introductory period net of the $450 balance transfer fees. If the interest rate rises to 10.99% after the 12-month period is over, the borrower could continue to save $88 per month. This is a good deal for the borrower. If, however, the interest rate climbs to 29.99%, the borrower could pay an additional $150 per month on the new card as compared to the old. (These calculations do not consider payment or purchase activity.)

Before applying for a new card with the intention of transferring balances, be careful to read the fine print of all terms and conditions. Crunch the numbers to see if you will actually end up saving money. Pay particular attention to upfront fees, the length of the introductory period and the rate of the card after the introductory period is over.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.