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Tuesday, March 5, 2024   

How banks use low rate offers to lock in high rates
by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the founder of DebtSmart.com. More about and DebtSmart can be found in the online media kit.
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Scott Bilker


I have used the lower interest rate checks from my credit card company to transfer debt. I noticed on my statement that the balances on the original rate and the new rate are not getting paid down proportionately. Can I get the company to apply my payment my way? Is the use of these checks a benefit or a curse?



It is wise to use low rate offers to save money on your debt. You correctly used the offer to your advantage however, the bank "tricked" you into locking in your prior balance at a higher rate. Well, tricked may be too strong because they do explain this in the fine print of their terms but, nonetheless, it is mostly an unknown condition and, therefore, effectively misleads the consumer into paying more when taking advantage of low-rate transfer deals.

What is happening is that your balance has been split between two interest rates. The interest rate on your original balance and the low-rate transfer offer. For example, let's say that you have a $5,000 credit limit with $4,000 charged at 9.99%. You suddenly receive a low-rate, 0%, transfer offer on your remaining credit limit ($1,000) and decide to use that money by transferring that $1,000 from another high rate card (12%). After you're done with all the transfers, you owe a total of $5,000, but $4,000 is at 9.99% and $1,000 is at 0%.

So here's my rhetorical question: How will a $100 payment be applied to your account?

You would want all $100 to go toward the 9.99% balance, but that is not how the bank is going to do it. The bank is going to apply the $100 to the 0% balance. This makes the 0%-balance $900 and locks the 9.99%-balance at $4,000. In other words, the bank is going to apply your payment in its best interests (no pun intended). That would be to pay everything to your low-rate balances first and lock in the balance at the higher rate, which creates more revenue for them!

You can avoid this catch-22 by using a DebtSmart technique! That is simply to make sure that your balance is $0 before taking advantage of the low-rate transfer.

Going back to that example. Let's say that you had those two cards again. One with a $4,000 balance at 9.99% and another with a $1,000 balance at 12% APR. The low-rate offer is on the card with the $4,000 balance. Your strategy is to first transfer your balance from the 9.99% card to the 12% card (in this example), making the balance $0 on the 9.99% card and $5,000 on the 12% card.

The low-rate 0%-transfer offer is on the 9.99% card, which now has a $0 balance. At this point you transfer the entire $5,000 to the 0% (was 9.99%) card from the 12% card. After completing these steps, your entire balance is at 0%. No split balances.

Of course, your entire payment is being applied to the 0% balance, but the $4,000 is not being charged 9.99%! That's how you beat them at their own game!




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