Advertising for Visa and Mastercard may tell you that some things are priceless, but everyone knows that banks and credit card companies have a hidden agenda when it comes to their customers: to siphon money from your bank account into their bank account. While there are many ways they accomplish this, there is a new trend that is particularly deceptive: excess balance transfer fees.
As you might expect, the marketing "pitch" to use these low promotional rates sounds great. I just received one from Washington Mutual with balance transfer checks entitling me to "1.99% APR through November 2008." This appeared to state that if I borrowed $ 10,000 at 1.99% by using the balance transfer, my total interest cost for the entire nine months would be under $ 150. Sounds like a great deal, right?
And it would be an excellent offer if not for one little thing, which can be found in the paragraph following the one line offer (in bold type) of 1.99% APR. Several lines down that following paragraph are the following words: "… a Cash Advance Fee of 5% ($ 10 minimum) per check will apply." To the credit of Washington Mutual, this information is not hidden in lightly printed six point type somewhere on the back page of the offer. That being acknowledged however, the "cash advance fee" is roughly two and one half times the interest rate of the offer.
So, it would appear that you are paying 7% for $ 10,000 for nine months, which comes to $ 525. But even that is not accurate, because the 5% cash advance fee is charged up front as a "finance charge" and you end up paying interest on it as well as on the $ 10,000 loan!
The way this works out is that 5% on $ 10,000 is $ 500. That is added to your loan, so your total amount owed is now $ 10,500. You then pay 1.99% interest on the whole thing. The net result is that you will pay closer to $ 650 in interest for the nine months on the $ 10,000, which comes to an annual interest rate of over 8.5%!
Now if you are paying double digit interest on your credit card debt, you might still want to take advantage of an offer like this. Low promotional rate balance transfers can do wonders to reduce the cost of your credit card debt and help you pay it off faster, if you choose the right offers and manage them effectively. However, before accepting any low promotional rate or balance transfer offer, be sure to work out the math to determine whether it is a move that makes sense for you.