Posted on May - 17 - 2010
Yet Another Reason to Do a Balance Transfer
If you have multiple types of balances on your credit card and are repaying little more than the monthly minimum, a 0% balance transfer may provide even more benefits than usual.
While most anyone with a credit card balance stands to save a substantial amount of money by taking advantage of 0% APR balance transfers that last up to 18 months, people who have used their credit cards for cash advances as well as purchases stand to reap even more savings.
According to a story by AP Personal Finance Writer Candice Choi, many of the nation’s largest credit card companies are applying all payments up to the minimum to balances that have the lowest interest rate.
Consequently, if you owe $1,000 from a cash advance at a 29.99% interest rate and $1,000 from purchases at a 14% interest rate, your monthly minimum payment will likely be used to reduce the low interest balance, not the 29.99% rate that is driving you to the poorhouse.
New CARD Act rules require credit card companies to apply payments above the minimum to balances with the highest interest rate, but these rules do not cover the money you are required to pay monthly.
This can also be a problem if you get 0% balance transfer checks in the mail. Let’s say you currently owe $3,000 at a 14% rate and transfer $3,000 to your card to take advantage of the 0% rate. Unless you pay more than the minimum, every payment you make will reduce the 0% balance, while the balance with 14% rate continues to rack up interest.
If your bank sends you balance transfer checks and you have a balance on your card, put those checks in the shredder and transfer your balance to a new card from a different company that offers 0% balance transfers.
If you currently have cash advance balances on your card, you’re likely to save $200 or more for every $1,000 you transfer to a new 0% balance transfer card, regardless of how your credit card company applies your minimum payment.
-Jeffrey Weber
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