Have you ever opened a credit card statement to find several blank checks inside? These check, known as balance transfer checks or convenience checks, offer you the chance to pay off credit card debt or make purchases at lower-than-normal interest rates. But there are some drawbacks to using them.
Here’s how they work.
- With balance transfer checks, the bank is usually offering a deal for a very low interest rate – sometimes as low as 0 percent—for a set period of time, often six months to a year.
- You can use the checks to move a balance from a high interest credit card (issued by Bank A) and pay it off at a lower interest rate (offered by Bank B’s balance transfer checks). Just write a balance transfer check to Bank A to zero out your high interest balance, and the amount of that check—with some additions—will appear on your credit card statement with Bank B.
- One of the drawbacks to balance transfer checks is fees that can run anywhere from 3 to 5 percent of the amount that you’re transferring. If you’re transferring a $5,000 balance with a 4 percent fee, you could end up paying an extra $200. Some banks do cap the fee at a certain amount, and others may waive it if you’re a customer in good credit and ask them to eliminate or reduce the fees.
- Do the math. Before you use a balance transfer check, figure out what you’ll pay in fees and compare it to what you’d pay in interest if you left the balance on your current higher-interest account. You may be surprised to find that you’re not saving much by moving the money.
- You can also use balance transfer checks to make new purchases or to provide yourself with some cash; the amount of the purchase goes on your credit card bill.
- A balance transfer check may be a real help if you’re faced with some unexpected financial emergency, giving you time to pay off the debt at a low interest rate.
- Make sure that what you’re using is really a balance transfer check. Credit card companies also offer cash advance checks, which are governed by a different set of rules. The interest rate you’ll pay on purchases made with cash advance checks is the same higher interest rate that you’ll pay on any cash advances on your credit card. There is usually no grace period, so the bank will begin charging interest on the purchase immediately.
- You may find a better deal by applying for a new balance transfer credit card. Some consumer financial experts believe that you get a better interest rate and a longer introductory term if you go with a new credit card company. But if you don’t want to open another credit card account, using a balance transfer check allows you to take advantage of the lower rate with your existing card issuer.
- A balance transfer check provides the biggest advantage if you pay off your account each month. Any payments that you make on the account are applied first to the low-interest balance, so you may not make a dent in the higher-interest balance. For the best financial results, pay off the entire balance on that card before the low introductory rate period ends.
- If you decide not to use the balance transfer checks you receive in your statement, shred them so that no one else can find them. They’re a prime target for identity thieves, who use them to charges purchases and/or take out cash on your credit card account.