Watch the Balance Transfers

Moving a card balance from a higher interest rate card to a lower interest rate one can make sense and save you money. But move carefully on these deals—and, in any case, don’t do them more than once or twice a year.

Remember: Transferring a balance is not the same thing as paying off a debt. The best way to free up more cash for the long haul is to eliminate credit card debt. You’ll need to continue to pay as much as you can on those credit cards.

Watch the fees. Some companies charge a “transaction fee” for the privilege of transferring a balance to their card.

When you transfer a balance, make sure that you continue to make minimum payments on your old card while waiting for a balance transfer to take effect, which can take several weeks.

Some balance transfer offers include fine print that says the company may check your credit score before offering you the low rate. If your score is too low (and it may still be pretty good, generally) the company may charge you a higher-than-advertised rate. Even though the offer might say 1.9 percent rate on balance transfers, you may qualify for a 10.99 percent rate.

The February 2000 New York state court decision Gerald Broder v. MBNA Corp., et al. considered charges of just such a rate-switching trick.

Broder had carried an MBNA MasterCard since 1987. He regularly used it to pay for purchases, generally paying off his purchase balances in full each month, without incurring any finance charges.

In October 1996, MBNA offered Broder a deal to take cash advances, subject to a special low annual percentage rate of 6.9 percent, for up to six months—through May 1997. At the end of the six-month period, the outstanding cash advance balance would be subject to the same 17.9 percent APR as Broder’s other outstanding unpaid purchase balance. The special offer brochure stated:

Your Annual Percentage Rate (APR) on cash advances, including balance transfers is 6.9% through your statement closing date in May 1997.

This means you can use the full power of your... MBNA MasterCard account along with this special low 6.9% Annual Percentage rate (APR) to reduce your cost of credit or even take advantage of sales and bargains .... And with your low limited-time APR of 6.9% on cash advances, including balance transfers, you may be able to save yourself some money (not to mention headaches) by simply paying off higher rate credit card or department store accounts....

Notice the use of the term “paying off.” Transferring a debt balance from one card to another isn’t “paying off” anything. It’s just changing the name of the lender you owe.

Broder accepted MBNA’s offer in November 1996 and made a balance transfer cash advance of $25,000 from another credit card. He was supposed to get the promotional rate of 6.9 percent on this amount. (At the time of the transfer, he didn’t have any outstanding unpaid balance on the MasterCard.)

In December 1997, MBNA made another cash advance offer to Broder. This time, the deal was a special low APR of 6.9 percent for up to six months— through June 1998. At the end of the six-month period, the outstanding cash advance balance would again jump to 17.9 percent.

This time the brochure stated:

Introducing your new 6.9% Annual percentage rate (APR) through your June 1998 statement closing date on Credit Card Access Checks and Balance Transfers.

MBNA is pleased to announce an APR so low you don’t even have to think twice about taking full advantage of your credit line. This is just about as inexpensive as it gets to use somebody else’s money.

And, better, because this rate is so good, MBNA is giving you all the way through the closing date of your June 1998 statement to take advantage of it.... We really hope you start taking advantage of your special MBNA APR in January and keep taking advantage of it through your June 1998 statement closing date.

In January 1998, Broder again took MBNA’s offer and obtained a balance transfer cash advance of $35,000 at the special rate.

After receiving the $25,000 and $35,000 cash advances, Broder continued to use MBNA’s card for purchases, generally in amounts totaling $500 to $2,200 each month. Each month during the promotion’s operative period, the payments to his account generally equaled the total new purchases shown on his monthly account statements.

But MBNA applied his payments first to the balance due on the advances made under the special promotion (which was a lot larger than the amounts of his total new monthly purchases).

Next: Tricky Accounting