Finding the best balance transfer cards
A balance transfer credit card is a card that can be used to pay off the balance owed on another credit card or loan at a lower interest rate. The average balance transfer credit card has a 0% APR for over 12 months, with a 3% balance transfer fee and a $0 annual fee. The purpose of a balance transfer credit card is to save both money and time, as reducing the overall cost of debt makes it easier to pay off the balance faster.
To help find the best balance transfer cards on the market, WalletHub.com recently compare 1,500+ credit card offers based on their balance transfer rates and fees, approval requirements, and other features. Additionally, Dr. Christopher J. Marquette, assistant professor of finance at Millikin University, offered his expertise on what to know regarding balance transfer credit cards and rates.
Marquette says the reason credit card companies offer 0% balance transfer rates is to gain additional customers.
"But, unlike with a retailer, for example, not all customers are the same to the credit card companies. Some customers add to the company's bottom line by using the credit card for purchases [generating fee income] and paying their balances and interest," he says.
Marquette added, "Other customers are money losers for the credit card company. These are customers who run up balances and don't pay the required balance and interest, causing losses for the card company on these accounts. The companies have a delicate balancing act in attracting additional customers. They attempt to attract new customers but want to avoid the customers from whom they are likely to incur losses."
Marquette says the biggest mistake people make with balance transfers is to "churn" credit cards for the introductory offer benefits. "This practice entails opening a credit card, transferring a balance for the 0% interest for the introductory period [which is usually between six months and two years], and then open a new card at the end of the period and transfer the balance for a 0% introductory rate on the new card," he says.
Dr. Christopher J. Marquette
“This scheme looks good in the short-term in that you can have an effectively continuous 0% interest loan just by opening new cards and paying the transfer fees," Marquette noted. "It does, however, have long-term consequences. The opening of new credit cards on a consistent basis can cause damage to an individual's credit rating and cause the credit card companies to stop giving them introductory deals."
So why aren't there more 0% balance transfer credit cards with $0 transfer fees? It's because there are fixed costs and variable costs to a credit card company associated with each customer.
"The fixed costs are incurred when signing the customer up and transferring any balances. The variable cost is the ongoing maintenance of the customer account," Marquette says. "The credit card company gets its revenue when the customer uses the card and pays their balances and interest. Use of the credit card is at the discretion of the customer, however. If a customer opens a credit card, transfers a balance, and then never uses the card again, the card company loses the fixed costs associated with the account. Therefore, in making these offers, the card company will usually charge enough to cover the fixed cost associated with transferring a balance to ensure it doesn't take a loss on the account."
Dr. Marquette holds a Bachelor of Science in Chemical Engineering from the University of Illinois at Urbana-Champaign, an MBA from Loyola University Chicago, and a Ph.D. in Finance from Texas A&M University.
Dr. Marquette has taught at universities in the United States and the United Arab Emirates for the past 20 years. He has also done executive education for the Sony Corporation and produced boot camp training for firms in the insurance and banking industries. His research has appeared in well-respected journals such as the Journal of Financial and Quantitative Analysis and Journal of Investing and Applied Financial Economics. He has received Best Paper awards at three different academic conferences. He also serves as the managing editor for the Journal for Global Business Advancement.