Using Credit Card Balance Transfer (Financials Series Part - 5)

Who are you?

Let’s say, you are a diligent credit card user. If you receive a credit card bill of $1,247.83, you pay off the entire $1,247.83 during the immediate weekend/some fixed day before ‘Due Date’. That way you never had to pay interest at an 19.99% (say) APR.

Of course, your credit card balance does not have to be a fixed amount every month. Phew, whose would be? Let it swing over a range that you got to manage. That’s fine. This post still applies to you.

The offer

One day you see an attractive offer: Obtain Balance Transfer upto $13,000 at 0% APR upto 12 months.

Hmm, a simpleton could think something along these lines -

If I can afford to pay just $(13,000 / 12 = ) $1,083.33 over every month’s usual credit card bill, I get to invest the entire $13,000 at once! This is an opportunity to do Lump-sum Investing which unlike the widely suggested Dollar Cost Averaging or SIP strategy has bigger potential.

Instead of investing $1,083.33 every month for the next 12 months, I get to invest all those amounts at once and I can slowly pay-off the 0% interest loan that enabled our scheme over the same 12-month period.

That does sound good until you see a clause like this:

If you usually pay for purchases in full each month to avoid interest, transferring a balance will change that. You will be charged interest on purchases unless you choose to pay your entire balance in full, including any transferred balances, by the first payment due date.

What is this statement alerting us to?

Purchases - This is the term denoting that $1,247.83 (or whatever that you used to diligently pay off every month until now) entire balance - The $13,000 (Balance Transfer amount) + Purchases (See above) first payment due date - ‘Due Date’ that occurs every month

Slow down and read that again. Even if you pay off the Balance Transfer amount in equal installments in addition to actual Purchases amount, your purchases made in the period are subject to 19.99% interest

If you have a way to designate what share of your payment goes to what balance, you can stop reading this but most do not.

You would be left having to pay interest on purchases which you always avoided having to deal with.

What’s the way out?

The clause ...unless you choose to pay your entire balance in full... tells us that unless the entire amount designated Statement Balance on your monthly statement (which includes the $13,000 Balance Transfer balance) is paid off, you would have to keep paying interest charges on Purchases made during that statement period.

Alternatively, you can stop making any Purchases on this particular card which results in zero interest charge.

On actual “Purchases” balance

Moreover, the “Purchases* balance is not just something you see on your monthly statement. Most of the credit card companies charge interest daily. So one day your interest could be high due to some big purchase. It does not matter whether you placed a refund later. That interest does not go back because it was already calculated. So any Purchases amount you see on month-end statement may not be what the interest is calculated over and it could be very different on the day you choose to pay your bill.