How do balance transfers work ?

Question

I've transferred balances from other credit cards to one with a lower interest rate several times. I notice on my statement, it lists them separately, along with the interest rate, but from month to month, sometimes one balance will be more than the last month or it may be less. My questions is, how is my payment distributed? How do they determine which balance is paid off first and why do the amounts fluctuate so that it almost seems as if my payment is not making a dent in either balance, although my overall balance is less? Make sense?

I guess I should have mentioned that I'm not making any additional charges on the card, but just paying down the balance.

Answer 1

If you send extra money to pay off the balance, creditors will always pay off the balance with the lowest interest rate 1st. My husband and I have 3 credit cards and we never mix and match promotional interest rates on the same card. If you transfer one balance to a card because it has a 0% interest rate. do not use that card for purchases until you've paid the 0% interest balance off. Cards should be used for emergencies or large ticket items. Especially since many cards offer extended warranties for electronics. Also be very careful to pay your bill on time since one late payment will jack up all your interest rates. Hope this helps!

Answer 2

Ah yes, the secret of the “promotional transfer”. The credit card company is hoping that you make charges on your card after you transfer a balance (or better yet, already have a balance that you transfer on top of). Your payments then go to pay off your lower interest transfer while your purchases or prior balance just lay there making money for them. In effect you are burying your more expensive debt under your low-interest transfer.

What to do? If you’re higher interest “buried debt” isn’t that much or isn’t that high an interest rate, then maybe just live with it, but STOP CHARGING ON THAT CARD! You’re just adding higher interest debt to that card.

If it looks like you’re in the hole (one of my Favorite credit card gives me an INSANE 25%+ interest rate, but routinely sends me 3% balance transfer offers, they’re just dying to trap me), and if you have balance transfer offers from other cards that you can use, then first make sure you have 0 debt on them so you’re not burying any higher interest debt, and then transfer that debt onto them. Then hide the card in the back of your sock drawer and don’t use it.

Credit companies will routinely charge 3% balance transfer fee (some have a max limit). Check the math, if the average interest on your buried and promo rate balances isn’t that bad, then save the 3%. If it looks like a bargain, do it.

Also, mark your calendar. Some promo rates go from 3 months to 1 year to the life of the balance. You need to keep track of them and stay ahead of the curve

Answer 3

The terms and conditions that you received when you opened the account govern how your payments are applied.
In general:
Fees (late fees, over limit fee, etc) are paid first.
Finance charges (interest) is paid next.
Any remaining payment is applied to balances "at the card issuers discretion"
The card issuer will apply payments to lower rate balances first. This keeps higher rate balances around longer, thus increasing future finance charges.

Answer 4

Check your original agreement. It is usually that they will pay off smaller balances first, and the percentage of how it distributed will vary from card to card.

Answer 5

always the lower amount paid off first