How does a balance transfer work on a cash-back reward credit card?
I have a rather large expense coming up (~$6,000), & I would like to know how a balance transfer will affect my personal situation. I pay all my cards in-full, but with this large expense coming up, I would like to execute my first balance transfer, without having to empty my Savings account.
Game plan:
- Use my 2% cash-back card to pay for the $6,000 purchase. ($120 cash back)
- Transfer the balance to another cash back card offering 2.99% for the life of the transfer.
- Take $3,000 out of my savings & pay down 50% of the balance.
- Make large monthly payments on the balance for 3-6 months, until I have paid it off.
My problem is this: The card I am transferring the balance to, is my favorite & most used card. Offering 5% cash on gas, 5% airline, 2% grocery, & 1.25% everywhere else. I would like to continue using the card after I transfer the balance.
My question is this: If I continue to use my card, & pay off NEW purchases of gas & grocery in-full, will I be assessed the regular finance charge APR of 13.99% because my balance is not “$0″ at the end of the month?
My ideas are these:
1. If my assumption above is correct, I can continue to use the card & paying off the new balance without penalty. As long as I continue making the minimum payments on the balance transfer side of the statement as well.
Example: $3,000 balance @ 2.99% with a minimum payment of 2% of the balance. 2% of balance = $60 + ~$7.50 in interest = $67.50. New gas & grocery purchases = $500. If I make a MINIMUM payment of $567.50, I will not be assessed any interest @ 13.99%, only the $7.50 on my 2.99% transfer, correct?
2 If my assumption above is NOT correct, I would have to pay down the balance transfer card to $0, transfer the balance, & not use it at ALL until the balance transfer was paid off. This way the only interest I would pay would be the 2.99%, correct?
Like I said, I’m a newbie to balance transfers, so if there are other options or if my ideas are way off, please feel free to enlighten me 
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August 2nd, 2009 at 10:27 am
It sounds like a reasonable plan.
A few things though.
If you’re going to transfer the balance, make a note of the day that the balance will revert to regular APR because the credit card company will not give you any warning.
New purchases are usually factored at the higher APR unless there is some clause in the fine print that says they won’t be. Unfortunately you can’t pay off the new charges and the transferred balance separately. The credit card company divides it up using some mystical formula, putting a percentage of your payment on one balance and the remainder on the other so technically, you won’t be paying off new purchases but making payments on the overall balance even though each carries a different APR. Even with such a large monthly payment, your new purchases will still accrue interest at the standard APR and will continue to do so until you pay off the whole balance…new and transferred.
When you get the bill after the transferred balance appears on it, you will see two rows farther down on the bill detailing the interest rate at which each balance is being factored, but when it comes to payments, it’s really all one balance.
Find out if there are any fees involved in transferring the balance. Quite often there are. It’s usually a percentage of the transferred amount up to a certain maximum figure that is set by the credit card company. It’s shouldn’t be a huge amount, but I imagine you want to know everything you may get hit with.
Your best bet is to call your credit card company just to be sure. With the state of the banks these days, they may possibly be offering something similar to what you’ve described. But it’s unlikely.
It’s not a good idea to transfer balances too much…it’s not great for your credit rating (no, they don’t tell you that in the ads and mailings).
Once is fine, but if you transfer repeatedly, on paper you look like a credit risk and that takes years to mend.
August 2nd, 2009 at 7:21 pm
There are two issues. Normally if you leave any balance on your credit card, you will be charged interest on the complete balance that was at the end of the billing period and not the balance after you make a payment.
Since most banks charge interest on the daily balance, it would be impossible to determine exactly how much interest will be charged but for purposes of this example, we will assume the purchases were on the card for the complete month. If you added $500 of new purchases, you would be charged interest for the month of about $5.83 for the new purchases whether you paid them off or not.
Then there is a second issue. I don’t know how your bank credits a payment. It could either credit the payment to the 13.99% balance or the 2.99% balance. If the bank credits payments to the 2.99% balance, your monthly interest will shift to the 13.99% balance. I suspect this is the way the bank will credit payments since it probably credits payments to the oldest balance.
August 4th, 2009 at 4:17 pm
it will not work. If you read the fine print on the credit cards, in almost ALL instances, you will not get to determine where your payment goes towards (meaning you cannot specify I want my payment of $400 to go towards only the new purchases). Plus, there is always a transaction fee (like 3% of the balance) for all balance transfers, so you will have to factor this in and see if it’s worth it.
In addition, the fine print almost always says they will apply your payments to the lower interest rates before applying it to the higher rates. My credit card says exactly that in the fine print, so you should definitely read the “Terms & Conditions” document very very carefully before executing your plan.
Therefore, if you really want to take advantage of the lower 2.99% APR, then after you transfer your balance to Card B (aka your fave card), then you will have to switch your purchases over to Card A (the 2% cashback one) and not charge anything else on card B to be sure you’re fully taking advantage of that 2.99%.