Credit card companies make their money from three sources. First, they charge a fee to the merchant every time a purchase is made. This fee is usually a percentage of the total amount charged, usually between 1% and 3%, and often a small per-transaction fee. Second, they make money by charging interest on balances that cardholders maintain. Most card will not charge an interest if the entire balance is paid each month. However, if there is any balance remaining after the due date, interest charges start accruing. Third, they charge fees and interest for cash advances and balance transfers from other cards. Typically, unless there is a special offer available, interest starts accumulating from the time of the cash advance, even if it is paid off at the end of the month.
There are many ways in which consumers can benefit from using credit cards. By leaving cash in an interest earning account and then charging all purchase during a month, it is possible to come out ahead. Assuming that the entire balance is paid off so that no interest accrues, the consumer will be ahead by whatever amount of interest they earned by leaving their cash in the interest-earning account all month.
Other benefits include award programs that pay card users for every dollar charged. The rewards can be frequent flyer miles, points that can be used for purchases, or cash back to the user.
Many consumers have credit card balances on their cards at all times, and therefore pay interest each month. Such people are often attracted by cards that offer lower rates. Consumers need to be careful that such rates are permanent: often these low rates are just valid for a shore period. The interest rates go higher after the introductory period. In addition, transfers to such cards often incur a transaction fee, which can be several percent. Consumers need to beware and read all of the details about such offers.
However, it is sometimes possible to get very good interest rates on balance transfers. Sometime there is no transfer fee. Sometimes there is an attractive interest rate. If a consumer has a good credit score, they may well be offered a transfer with no fee and a low interest rate for the “life” of the balance. Therefore, the consumer is getting a low interest rate loan. Consumers need to be careful, however. Often, there is an offer of an attractive, low interest rate, but it only lasts for a relatively short period of time, after which the interest goes up dramatically. Consumers may jump at such low interest rates thinking that they will be able to pay off the entire balance before the rate goes up only to find that they get stuck with the higher rate when circumstances keep them from paying off the entire balance in time.
The key thing is to be careful and make sure that all aspects of offers are understood. Consumers should look for potential transfers with no transfer fees and low interest rates for the entire duration the balance stands. Before making a decision, consumers should compute the entire cost of such a transaction by comparing the total interest that would be paid without making the transfer, to the total of any fees and interest on the new card should the transfer be made. By waiting for good offers, it is possible to save a considerable amount.