Are 0 percent APR balance transfer credit cards doomed?
Offers dwindle in number and length of interest-free intro period
By LaRita Heet
The one-two punch of today's faltering economy and lower bank earnings may have dealt a lethal blow to the 0 percent interest, no-fee balance transfer credit cards, say industry and financial experts.
Remember a couple of years ago, when credit card offers filled your mailbox, begging you to transfer your existing high-interest credit card balances onto a new card, at 0 percent interest for 18 months, with no transfer fees? Glen Handler, an internal audit director from Verona, N.J., does. (See Compare today's 0 percent balance transfer offers.)
About three years ago, Handler, 44, was "flooded" with 0 percent balance transfer offers, and decided to take the card issuers up on their offers. Along the way, he became an expert at 0 percent balance transfer credit card arbitrage, he says. "I indulged in many, many 0 percent balance transfers and 0 percent cash advance checks and invested all the proceeds into 3 percent to 6 percent interest-bearing bank accounts, thereby netting thousands of dollars in interest income or 'free money' each year," says Handler.
Within the past year, however, consumers nationwide have noticed declines in the amounts and transfer periods of the newer 0 percent balance transfer offers. "The longest 0 percent period was for 18 months, although the nine- to 12-month range was more common. The offers slowed a little bit about a year ago, and then slowed more noticeably in the last six months," says Handler.
Financial realities hit credit card companies
Robert Hammer, president and CEO of R.K. Hammer Investment Bankers, a privately held bank card advisory firm in the Los Angeles area, says the reason 0 percent balance transfer cards continue to slump is a simple "dollars-and-cents calculation." "Profits are harder to come by this year than, I think, in almost any period in my 25 years in this business," he says. "This is going to be a difficult year for lots of different reasons: You've got a weakened economy, you've got record foreclosures, bankruptcies are climbing, collection costs are going up."
The 0 percent offers slowed a bit about a year ago, but even more noticeably in the last six months.
|-- Glen Handler
Internal audit director
The combination of these factors means earnings are down, and credit card companies are scrambling to cut costs wherever possible, he says. "There will be a handful of best-in-class performers without a problem, but that's only because they're awfully good at what they're doing. Most of us are going to have a tough time making the money we've been used to."
John Jahera, Colonial Bank Professor of the department of finance at Alabama's Auburn University, agrees. "It essentially is a business decision, in the sense that the credit card issuers have obviously looked at the revenues that they can generate from convincing people to transfer, versus the cost of securing those transfers," says Jahera.
Hammer says that most credit card companies have only a couple of ways to deal with these economical realities: either "raise fees and risk the ire of Congress and consumers -- some are doing that," or "cut back any programs that cut into your operating profit."
Balance transfer fees rise
The drop in the volume and length of 0 percent balance transfer offers, combined with the often high balance transfer fees, have led many consumers to say, "Thanks but no thanks" to such offers. While some card issuers continue to offer 0 percent balance transfers for six to 12 months, most of these transfers come with a hefty price tag: the average 3 percent "transfer fee" with a minimum fee of $5 to $10, and an unlimited maximum fee. The price of transferring a balance of $10,000 to a new 0 percent interest card -- often for just a three to six month period -- can get you slapped with a $300 fee.
The increase of balance transfer fees forced Handler to quit the arbitrage game. "The most significant difference lately is that there generally is no maximum amount on the balance transfer fee today, whereas before that transfer fee was capped at a modest $50 to $100. The hike in the balance transfer fee now makes the offers literally unprofitable for me personally," he says.
There are still some cards with fee caps. For example, balance transfer fees on the three Advanta business credit cards (Advanta Platinum Business Card with Unlimited Rewards, Advanta Platinum Small Business Credit Card, and Advanta Kiva Business Card) top out at $90 -- not a terrible price for a business to pay, especially in light of the lengthy (by today's terms) 15-month 0 percent balance transfer rate Advanta is offering.
Balance transfer fees for the BP Visa and three Chase cards (Chase Business Rebate Card, Chase Free Cash Rewards Card and Chase Platinum Visa Business Card) max out at $99. The three 0 percent balance transfer Discover cards -- Discover Miles, Discover More and Discover Open Road -- charge maximum balance transfer fees of $75, but also come with a significant stipulation: All balance transfers must be made before Jan. 1, 2009.
Matt Towson, senior manager of media relations at Discover Financial, says that one reason for the "talk that the 0 percent APR" is "going away" could be as a result of the credit card issuers' anxiety over regarding credit card billing and the Federal Reserve's proposed rules changes other practices. In its 17-page response to the Fed's proposal, Discover Financial details how, if the Fed's proposal goes into effect as is, "these promotional offers may have to either go away or be dramatically changed," says Towson.Understanding the terms
For those holding out hope for fee-free, 0 percent balance transfer credit card offers, pitifully few remain. The Bank of America Pet Rewards Visa, for example, allows no-fee balance transfers for six months, but only (here comes the fine print) on those balances transferred immediately upon opening the new Visa account. Transfer your balances onto that Pet Rewards Visa any other time, and you'll pay the unlimited 3 percent fee.
Credit card issuers have obviously looked at the revenues that they can generate from convincing people to transfer versus the cost of securing those transfers.
|-- John Jahera
Professor, Auburn University
The remaining four fee-free, 0 percent balance transfer cards are all offered under the general ownership umbrella of Pulaski Bank, the Arkansas-based bank that reserves its card offers to those with stellar credit. The cards include three Iberia Bank credit cards (Iberia Bank Visa Classic, Iberia Bank Visa Gold Cash Back and Iberia Bank Platinum), and one Pulaski Bank MasterCard or Visa. The introductory 0 percent balance transfer periods on the Pulaski and Iberia cards last six months from the date of transfer. The Iberia card offers only apply if the balance transfer is made within the first three months of opening the account.
Wise consumers do their homework and read the terms and conditions legalese -- a vital step that many consumers skip -- of any credit card offer before accepting. Keep in mind that most 0 percent balance transfer credit cards require excellent credit -- and just because you were sent a "preapproved" application, there is no guarantee you will be approved for the card, or for its most attractive terms.
Finally, remember credit card introductory offers -- including those for 0 percent balance transfers -- require cardholders to adhere strictly to the terms and conditions, or lose all introductory rates and perks. If your monthly payment is posted one day late, or if you exceed your credit limit by just a few dollars, that once-lovely 0 percent APR can transform into an APR of 30 percent or higher before you can say "default APR" -- and you will pay the price, quite literally, for years to come.
The future of 0 percent balance transfers
Hammer expects that there will be fewer and fewer 0 percent balance transfers over time. They may not disappear completely, "but the mainstream isn't going to be doing much of that kind of thing anymore," he says.
The end of the 0 percent balance transfers, however, is not the end of credit card companies' attempts to reduce operating and marketing expenses. "You don't want to go out of business, you have to do some things to stay in business, but can you do it in a more efficient way?" says Hammer. "If you can, you're going to make more money, and you're going to stay in business for the long haul. If you can't, you're going to be bought out by somebody who does."
See related: Compare today's 0 percent balance transfer offers, Credit card issuers sharply tighten lending standards, Federal Reserve proposed rules changes draw massive response, Credit card arbitrage: Easy, but dangerous money
Published: September 18, 2008
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