Lending Club Blog

Dirty Little Credit Card Balance Transfer Secrets Exposed

The following is a guest post by the NerdWallet.com team. NerdWallet is a website that helps you compare and find low interest rate credit card offers. The Nerdwallet team of finance bloggers and experts write for Forbes Moneybuilder Blog, Huffington Post, the Christian Science Monitor and many other outlets.

Do you remember the CARD Act of 2009? If so, then you know it was created to protect American consumers from being held hostage by credit card companies.  This Act has done a good job in some respects, but there are some dirty tricks that you should be aware of before truly claiming victory.

Surveys show that the average American household has nearly $5,000 in unpaid credit card debt, most of whom are searching for ways to pay off these debts cheaply. If you’re like most, you have probably thought of transferring over your balance from higher interest cards to a card with a low introductory interest rate, but should you?

The Use of Balance Transfers Before the CARD Act

Let’s say you have the average household credit card debt of $5,000, and last year you responded to an offer from First Friendly Bank for a 0% APR on a balance transfer credit card. Likely you decided to do this (after reading the fine print of course), thinking that you could pay off your debt before the intro period ended and the higher 15% interest rate kicked in.

So you went ahead and got the credit card and transferred your balance over. You felt confident that you would be able to pay off the $5,000, and even used the extra room on the credit card to pay off an accumulating pile of other bills that was worth $1,000.

Eager to get rid of some of your debt, you decide to send in $500 as a first payment and it is applied to your balance. Now, you likely won’t see this noted on your statement, but your balance transfer is accounted for by your bank as a separate balance from your other bills, and the two incur their own separate interest rates.  Now, what will the bank do to split the $500 you sent in between the two balances?

Just think of these two balances as two different bowls.  The bank would previously have put your entire $500 payment in the balance transfer bowl.  During the pre-CARD Act era, the other bowl wouldn’t have seen any of that money until the other balance transfer bowl was completely taken care of. So you would be charged the full 15% interest on the $1,000 that you spent until you fully paid off the $5,000 from the other balance. If it ended up taking you a full year to pay this off, you would have generated $160 worth of interest on your $1,000 bowl. Then if it took more than a year, that $160 would continue to grow.

Are Balance Transfers Safer Post-CARD Act?

President Obama signed credit card legislation in 2009 that changed the way banks have to behave in situations like that above. Now, these credit card companies are required to apply payments made by consumers to the bowl with the higher interest rate first, no matter how many bowls you have and which have the biggest balances. Of course, this doesn’t mean that it is 100 percent safe – nothing ever truly is. There is a catch within the fine print so that only payments greater than the minimum payment have to be applied to the bowl with the highest interest. So they are still given the freedom to put minimum payments to any of the bowls they wish to.

If you’re only able to pay the minimum payments on your charge cards, all of those payments will be going to the balance transfer bowl. This means that you are going to continue paying off your low interest or 0% credit card balances while the purchases you make still get charged the higher APRs. This is why it is important for consumers to do everything within their power to pay more than just the minimum payment monthly.

Other Dirty Secrets to Know About

Other than the interest rates that are being charged by these banks and the methods they use for the balance transfers, financial institutions are charging upfront fees for transferred balances. A little over a year ago, these fees were typically around 3%, which means you’d pay about $150 upfront for your $5,000 balance transfer. Today, many of these transfer fees are even higher at 5%, which is $250 for a $5,000 balance transfer.

Then there is the problem with professional credit card schemes that banks have been employing since the CARD Act was established. These professional credit cards are none other than business credit cards, which aren’t protected by the Act. So if you decide to get one of these business cards for transferring your balance or in order to take advantage of deals on introductory purchase APRs, the bank has the freedom to put the payments you make on low-rate balances, while charging you the max interest rates from other balances.

If used responsibly, credit cards can indeed be a great way to manage money, but it’s important to keep an eye on the fine print. The only way that these credit cards will work favorably for you is if you are knowledgeable about mitigating the fees that you have to face at each turn, and if you are able to make full payments each month. Dealing with unnecessary interest fees can quickly trip you down a dark abyss, so try to avoid them as best you can, perhaps look at personal loans with fixed rates and payments as a more predictable alternative.

Image courtesy of  Steven Depolo.

Monday, May 16th, 2011 at 3:08 pm

Comments (1)

  1. Cory:

    Again the rule for credit cards should be to stay out of credit
    card debt altogether. It is a wonder anyone could keep track of all
    the “rules” anyway. Thanks – C

    June 4th, 2011 at 2:58 pm


5 Ways to Get Your Finances Ready for the Holidays

How to Build a Budget: Part 1

The State of Debt: 2016

Types of Loans 101

See more
Lending Club Awards
  • Archives z

Recent Posts

5 Ways to Get Your Finances Ready for the Holidays

Read More »
December 1, 2016

How to Build a Budget: Part 1

Living on a budget. It can sound scary, right?… Read More »
November 21, 2016

Five Signs Your Business Needs Capital

Knowing when your business needs working capital— and promptly… Read More »
November 10, 2016

How does a car refinance loan work?

Whether your goal is to lower your monthly car… Read More »
November 2, 2016

Are you paying too much for your auto loan?

How refinancing your auto loan with a better rate… Read More »
October 25, 2016

The State of Debt: 2016

Politics can be a divisive topic, where issues and… Read More »
October 24, 2016

Lending Club Teams Up with United MileagePlus® to Offer Customers More

  When it comes to… Read More »
October 21, 2016

Patrick Dunne: A Message to Investors

I wanted to take a moment to introduce myself… Read More »
September 29, 2016

Line of Credit vs. Loan

Lines of credit (LOCs) and small business term loans… Read More »
September 28, 2016

Types of Loans 101

There are many types of loans out there and… Read More »
September 16, 2016


We went public today!

Ringing the bell this morning at the New York… Read More »
December 11, 2014

New and Improved Statistics Page

We recently redesigned our Loan Statistics page to make… Read More »
November 13, 2014

Lending Club Honored with Economist Innovation Award

This month I was honored… Read More »
October 15, 2014

Welcome Vermont Investors!

Today, we’re thrilled to welcome residents of the state… Read More »
September 4, 2014

We filed to go public today

We filed a registration statement with the SEC today… Read More »
August 27, 2014

Our Billion Dollar Quarter

We’re excited to announce  that we’ve facilitated over $5… Read More »
July 8, 2014

Is Lending Club Available in My State?

Is Lending Club available in my state? That is… Read More »
July 7, 2014

Lending Club Joins Senator Cory Booker to Discuss Improving Access to Capital for Small Businesses

Read More »
June 20, 2014

Lending Club Named a CNBC Top 50 Disruptor for a Second Year

For the second year in… Read More »
June 17, 2014

PRIME is now Automated Investing

Lending Club is excited to announce that PRIME has… Read More »
May 14, 2014
View All w