Are Credit Card Balance Transfers Right for Me?

Free Money!!! That sounds too good to be true, doesn’t it? Well, not only is it true but it might soon be coming to a mailbox near you.

Over the past 12 months a new style of rewards card has become one of the most popular offerings from the plastic community — the balance transfer card.

Rather than tempting you with airline miles, points and cash back, many credit card issuers are offering to take over the balances from your existing credit cards and cut you the deal of the century for up 6 to 18 months with no interest.

In addition, most of the better offers also include no interest on new purchases for roughly the same period of time. And, if you’re lucky, you’ll find one that doesn’t have a balance transfer fee or an annual fee.

Because credit card issuers are not non-profit organizations, you might find yourself asking a simple question: Why are these offers so good and how are the credit card issuers making money? Both are valid questions with hard to find answers.

The answer to “why” isn’t just one answer, but several. The most underreported reason for these relatively new aggressive offers is kind of an apology.

The CARD Act

In the months leading up to the implementation of the CARD Act, many credit card issuers were culling down their cardholder base and shutting down consumers who were either unprofitable or risky.

The CARD Act promised to make it more difficult to mitigate cardholder risk, so card issuers were doing all they could to clean out their closets before it became more difficult to do so.

After the Act was fully understood and implemented, it became clear that credit card issuers still had a large number of options to protect themselves from downside borrower risk. Now they needed to get back customers that had been shut down, and that’s not easy.

Consumers have selectively good memories and while many can’t tell you the interest rates on their existing credit cards, most of them can name the banks that shut down their cards.

The bottom line: if the credit card issuer wants you back, it’s going to need to overwhelm you with a great offer.

Interchange Fees

Another reason issuers are so aggressive is because of the cap on the fees that can be charged on debit card usage called “interchange.” You don’t pay this fee — the merchant that accepts a debit or credit card does.

The maximum interchange or “swipe” fee that can be charged on a debit card transaction is 21 cents, plus a tiny amount more to cover fraud risk. There is no such cap on interchange fees when you use your credit card.

So, even if you never pay interest or any fees, a card issuer does better financially when you use a credit card instead of a debit card.

The bottom line: banks would rather you use credit over debit.

Interest Income

The last reason I’ll address is the issue of interest income. Yes, when the 0% safe harbor expires, you’re going to have to start paying interest on the balance. You’ll also have to pay interest on new purchases, assuming you carry a balance.

Notwithstanding those issues, one thing is absolutely true when it comes to offering a balance transfer deal: the consumer is willing to use their card, get into debt, and pay interest.

These are three attributes of a card user that are not guaranteed when credit card issuers go through their normal prospecting practice of direct mail solicitations. Those solicitations are mainly sent to consumers because of their credit risk and credit reports.

Someone could open a new card pursuant to one of those offers and never use the card, which is a waste of time and money to the card issuer.

But, someone who is transferring in a balance from another card is practically a built in profit center. As such, the card issuers are more willing to make aggressive offers to get them in the door.

When Balance Transfers Make Sense

Now, don’t get me wrong about this. Not everyone can get one of these cards. These great deals are reserved for consumers who have strong credit scores.

And, if you are simply moving debt from one card to another so you can do more shopping, then you’re going to lose in the long run.

However, if you use the 0% time as a grace period where you aggressively work your balance toward $0, then these deals really can’t be beat.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.