Using a balance transfer credit card, you may be able to consolidate balances from multiple credit cards, allowing you to potentially save money by paying down your debt quicker and avoiding high interest rates.
Some cards even offer an introductory low or 0% annual percentage rate (APR) on balance transfers for periods as long as 18 to 21 months.
And sometimes, they’ll offer the same promotional rate and period on new purchases as well. This means that if you use your card for purchases during the promotional time period, you may not be charged interest on the purchases or transferred balances.
But this isn’t always the case.
What if my balance transfer and purchase APRs are different?
Sometimes the promotional period for purchases may be different than that for balance transfers, or your card may not offer a promotional period for new purchases at all.
For example, some cards offer a lengthy 0% introductory APR for balance transfers, but the standard APR still applies to purchases during that time period.
With this type of offer, using the card for purchases could lead you to build an interest-bearing purchase balance alongside any amounts you transferred to the card under a 0% APR balance transfer offer.
Having two different interest rates on one credit card may be confusing. So if you transfer a balance, use your card for purchases and can’t pay your balance in full, how does the card’s issuer apply your payment?
The impact of differing interest rates
The balances you’re carrying and their interest rates influence how the issuer applies your payment.
The Credit CARD Act of 2009 generally requires issuers to apply payments that are higher than the minimum due to the balance with the highest interest rate. But what about the amount equal to the minimum payment?
Rob Tacey, vice president, manager of public relations at JP Morgan Chase, says, “When you make a payment, generally, we first apply your minimum payment to the balance on your monthly statement with the lowest APR. Any payment above your minimum payment would generally then be applied to the balance on your monthly statement with the highest APR.”
The same is true with many of the other major card issuers, including Discover, Citi, Wells Fargo, Capital One and American Express.
An example of how an issuer might apply your payment
You could wind up with different interest rates on balances because you made a cash advance, have a penalty APR or have a promotional rate on a balance transfer.
Say you open a new balance transfer card that offers 0% APR on balance transfers for 15 months with no transfer fee, but the card doesn’t offer a promotional rate for purchases. You transfer $1,000 to the card, and during the first statement period you make $50 worth of purchases. Your purchase APR is 15%.
When your statement arrives, it shows a balance of $1,050, and you see you have a minimum payment of $35 due. You decide to make the minimum payment but the entire amount goes toward your balance with the lowest APR — your balance transfer.
If you don’t make any additional purchases during the following billing cycle, the next month’s statement may show a balance of $1,015.63.
- $965 as the balance transfer balance
- $50 as your balance from the previous month
- $0.63 interest accrued on the $50
This means that because of how your issuer applied your payment, you may wind up with a balance that accrues interest when you only make minimum payments. If you continue to only make minimum payments, the interest will compound each month, and making additional purchases can increase the impact.
At the end of the promotional period, the total remaining balance is subject to your interest rate for the card. Making a habit using the card for purchases without a plan to pay down the overall debt could leave you with a larger total balance than the amount you transferred at the start.
In the same scenario as above, would happen if you made a $135 payment?
Thirty-five dollars (the minimum payment) would go toward the balance transfer balance, $50 would go to the purchases balance and whatever remains would further pay down the balance transfer.
Changes during the final months of a promotion
The Credit CARD Act of 2009 generally requires that during the final two billing statements before your promotional rate expires, the entire amount in excess of your minimum required payment must go toward the balance with the promotional rate.
In other words, if you have a balance transfer offer with a 0% APR, your entire payment in the final two months of the 0% balance transfer period will go toward paying down the balance transfer.
This means that if your purchases aren’t covered by a promotional rate, you won’t be able to pay down the interest-bearing purchase balance during the final two months of your balance transfer promotional APR period unless your balance transfer is paid off.
To avoid this, try to pay down any purchase balance before the final two billing cycles and avoid making new purchases with the card during those two months.
While that may seem unfair, in some cases this can benefit cardholders because it allows them to pay down their balance transfers — or other purchases with a promotional rate — without having to pay off the card’s balance in full.
When you carry credit card balances with different interest rates, the issuer can apply the equivalent of your minimum due to the balance with the lowest APR and is generally required to apply the remainder of your payment to the balance with the highest APR.
You can avoid this conundrum by looking for a balance transfer card that has the same promotional offer and period for balance transfers and purchases. Alternatively, you could transfer a balance to a card but never use it for purchases.