Many Americans are in for a shock. The era of bouncing our balances to new credit cards to take advantage of low interest rates on large purchases is over. Consumers took advantage of the low, 3% balance transfer fees of the past by shouldering their debts over to lower rate cards. It was a convenient way to get out from under an existing higher rate.
But now, consumers are going to face a "triple whammy" under changes made by lenders that will alter the credit card industry and end whatever benefits consumers thought they received by leapfrogging their balances. Small business owners have already felt the heat as new federal capital regulations burst the easy pipeline to credit lines. Under federal laws that go into effect next February, lenders will be forced to apply your payments to the account portions that are attached to the highest rate of interest. In reaction, many lenders may extend longer deals on "no interest" offers. Ultimately, it can reduce finance charges.
Here are three trends that may materialize under the new regulatory provisions:
Balance Transfer Offers Will Bear Higher Interest Fees
In reaction to lower interest rates, some lenders will increase the percentage on balance transfer fees when consumers come looking. The practice is already underway. While fee limits are cut, banks are already raising transfer charges to recoup their losses. Bank of America saw it coming and boosted its balance transfer fee to 4%. Other lenders, including HSBC, Chase, and Discover have taken offers with 5% fees to the marketplace to test the waters. If you're paying upwards of 20% on an expired offer for financing electronics or furniture, the up-front 5% transfer fee may look attractive. But the increased fees come with limitations on benefits you might receive for other transfers. It can be tricky.
New, Shorter Introductory Periods Will Spark Faster Repayments on Balances
Previous promotions granted consumers as much as a year before they accrued finance charges. But with the new realities, account managers are looking to earn interest as quickly as possible. That means shorter introductory periods that automatically apply finance charges over the promotion period of your balance. Ouch. The CEO of Discover Financial let loose in a conference call his expectations for dramatic cutbacks on the durations for balance transfer promotions. This is probably a harbinger of how other lenders will react.
Balance Transfer Offers for Zero Percent Will Evaporate
Credit card companies still think that balance transfer offers are great bait for attracting customers from their competitors, but they'll need to turn a profit under the new conditions. Hence, you'll find more transfer promotions in the 2.99% to 4.99% range than the zero percent rate consumers have come to love. The net result is that you may have to take the hit of paying small finance charges in lieu of paying higher interest rates that you assumed with prior promotions.
The "triple whammy" reflects the credit card industry's drastic need to stop the bleeding on its own debt, which means that consumers--as always--will bear the brunt. That may mean the game of credit card musical chairs is over.