Balance transfers become costly

Banks are changing their strategies toward love 'em and leave 'em credit card users -- the kind who are seduced by teaser rates but never make a long-term commitment. Fed up with their faithless ways, issuers are either trying to win their loyalty or ward them off.

Consumers who switch balances from card to card in a constant quest for bargains will find that some banks are trying to retain them by offering attractive fixed interest rates, while others are repelling them with tough terms and high costs.

Credit card companies like loyalty. And temporary annual percentage rates often attract temporary customers, or rate-surfers.

"Consumers were getting a little too sophisticated for them," notes Ken McEldowney, executive director of Consumer Action, an advocacy and education organization.

"It costs a lot to get a customer in the first place, but then they were paying down balances at 2 percent and moving on to the next card."

Bye-bye super-low teasers
As a result, some issuers have abandoned the super-low teaser rates on balance transfers in favor of low fixed ones. Bank of America, Capital One, Fleet Financial and American Express are among the major players that have offered deals that would make a card hopper want to stick around.

Bank of America tempts people to "transfer balances for the last time" with a gold and platinum offer featuring an 8.9 APR that lasts until the balance is paid off. American Express is giving Optima platinum customers the same opportunity -- 8.9 percent that doesn't expire until the transferred amount is wiped out.

Capital One's Visa platinum card carries a 9.9 percent APR on balance transfers and purchases. Fleet is still using a teaser rate -- 2.99 percent for a platinum MasterCard -- but it goes to an attractive 10.6 percent after six months.

These offers are golden opportunities for people looking to pay down balances.

"For the consumer who wants to get their financial house in order, this is a good way of doing it," says McEldowney. "You can work out a repayment plan that fits your budget and save a huge amount of money on interest."

The new pitfalls of balance transfers
Other issuers are not as generous with balance-bouncers. Providian Financial gives Aria Visa platinum customers three billing cycles to clear a balance and make purchases without paying interest. After that, purchases go to 7.99 percent but transfers jump to 12.99 to 21.99 percent. The customer doesn't know what that rate will be until he or she receives the card agreement.

This tactic, known as risk-based or tiered pricing, is one of the potential pitfalls of balance transfers -- and card contracts in general.

"That is one thing we are very critical of," says McEldowney. "There is no longer a willingness to give a firm rate. Instead, they give you a range of rates."

Other strategies issuers use to deter rate-surfers include allowing only high transfer amounts, such as $5,000; limiting the number of transfers you can make; applying teaser rates to new purchases only, and charging cash advance fees.

Cash advance fees on substantial balance switches can nullify the benefits of a low interest rate. If a customer switches $5,000 from Card A to Card B, the issuer of Card B might charge 3 percent, or $150.

"They can really eat into your savings," says McEldowney. "Cash advance fees are something you want to avoid."

Balance transfer tricks
Another impediment to card hopping is the volatile rate environment. Folks who can't snag the best deals will find themselves paying hefty APRs unless they can get rid of balances quickly.

Balance transfers are tricky. Card shoppers who want to move balances must read the fine print carefully and call the issuer for explanations if necessary. Before making a switch, it pays to nail down answers to the following questions:

• How long does the introductory rate last?
• Does the teaser rate apply to balance transfers, purchases or both?
• What is the APR after the intro rate expires?
• Is the intro rate long enough to pay off the transferred balance?
• Is there a fee for transferring balances?
• Is there an annual fee? What are the other fees -- for being late, over the limit?
• Does the issuer cancel the teaser rate if you are one day late with a payment?
• Does the issuer jack up your rate if you are late paying other financial obligations? Some issuers monitor credit reports for slip-ups.
• How long does it take to complete the balance transfer?

Card contracts are difficult to decipher, but balance transfers make them even cloudier. For example, MBNA agreements contain a sentence that says: "Neither cash advances nor balance transfers may be used to pay off or pay down any MBNA account."

The sentence baffled a few industry insiders and a couple of MBNA customer service representatives. How can an issuer prohibit a customer from paying off their card with a balance transfer or cash advance?

A customer service supervisor cleared up the confusion. "Some customers have more than one account with us. When we have teaser rates, some people try to switch balances from one MBNA card to another," she explained. "We don't allow our own customers to float money. It's called kiting. It's illegal."

Still, balance transfers remain popular
Despite their subtle traps, balance transfers are popular with consumers. In 1998, 82 percent of all direct mail solicitations contained the option, according to BAIGlobal Inc., a market research firm in Tarrytown, N.Y. Last year, balance transfer offers were included in 76 percent of mailings.

"Anybody out there trying to launch a new card has got to offer that," says Kate Permut, vice president of marketing for BAIGlobal. "Maybe balance transfers were a new kind of thing for a while, but now they're a given."

But Permut says people are not choosing cards because they are platinum, gold or have a juicy feature such as a low-rate balance transfer. She cites that as one reason response rates to card mailings reached an all-time low last year. Of 2.9 billion solicitations, only 1 percent received a response, BAIGlobal research shows.

"Consumers are getting smarter," says Permut. "They don't care about colors. They're looking at the overall cost and the fees."