Many people turn to promotional 0% balance transfer credit cards to help them consolidate their high-interest debts or to participate in credit card arbitrage (using low interest debt to fund high interest savings accounts). In another post I’ll cover why these types of moves might benefit you. Both basically involve leveraging the interest rate on the card during the promotional period.
I used balance transfers like this when I was paying down my high-interest debt. And I ended up saving some money in the process. I haven’t written on this subject yet because I first wanted to touch on some of the dangers of doing this. While there are some definite financial benefits to using these balance transfers there are some things to watch out for that can make a good deal turn sour pretty quick. After all, credit card companies wouldn’t offer up these deals if they weren’t financially rewarding for them and not you. The truth is, though, that over the past couple of years, credit card users have wised up and started doing these deals the right way or simply avoiding them altogether. Anyway, here’s some things to keep in mind if you ever want to use a 0% balance transfer credit card.
Paying Balance Transfer Fees – The first thing you’ll want to watch out for are the balance transfer fees that the credit card companies are going to want to charge you to make the transfer. A typical fee is around 3% of the amount you are transferring. Some card companies set a cap limit on this around $75. Ideally you’ll want to pay no transfer fees for these deals. But that’s getting harder and harder as the card companies have wised up to users taking advantage of these promotions. How do you avoid the fees? I’d first try calling the card company up and asking them if they will waive it for you, or at least cap it at a lower level. If they won’t budge then look for one of the few remaining cards out there that don’t charge a fee. Fees of course can negate any money you save with doing the transfer. So avoid them at all costs.
Missing a Payment – Okay, let’s say you’ve transferred your balance over to the new card and it’s sitting pretty at 0% interest. A month goes by and you forget to make the minimum payment. Not good. According to many of these deals, your 0% rate could instantly go away and you’re back to a ridiculously high interest rate. Maybe even higher than your original rate. You don’t want to miss a payment. Set yourself a reminder on a work calendar or something. Make this balance a real priority so you stay on top of it and avoid losing your promotional rate.
Paying the New Balance Off Too Early – Paying off your credit card balances are always a good idea right? Well, if you’ve gone through the trouble of making a balance transfer to a 0% interest rate card then you are wasting all that effort if you pay it off too early. There is no penalty usually for doing this (paying it off early), but it has an effect on the amount of money you are saving by doing the transfer. The best thing to do is to divide your balance up into the number of payments you’ll need to make before the promotional period is over. Then, just make that payment each month. That extra cash that you could potentially put towards prepaying this debt could be sitting in a high-interest savings account earning some nice interest for you. This all goes back to leverage. You want your money working for you, not against you.
Canceling the Old Card – You should think twice before canceling an old credit card. Your FICO score is based on, among other things, your credit history. If you close an old account just because you don’t have a balance there anymore, you lose that history and that could lower your credit score. So, once you pay off the old card with the transfer money, consider using it to pay a monthly recurring bill and simply paying the small amount off every month. If it’s a reward credit card you definitely want to make sure you cash in all the rewards before you close it. I understand though, if you’re just looking to get rid of all your cards and want them closed. If that’s your goal, then skip this warning.
Missing the Expiration Date – This is similar to missing a payment. The 0% promotional rate will expire anywhere from 3 to 18 months. Please, make sure you set yourself a reminder to have this new balance fully paid off by the time the promotional period expires. If you miss this date and by then you still have a balance on the card, many cards will void the entire promotional period and make you retroactively pay the interest rate as if the promotional rate wasn’t there. This is not good, and only negates the whole reason you made the transfer.
Don’t Put Purchases or Cash Advances on Top of the 0% Balance – Lastly, here’s another credit card company fine print move you want to avoid. Don’t use the promotional rate card for anything other than the transfer for the promotional period. Why? Because they apply your payments to the purchases or cash advances last. Thus, burying these high interest charges under your 0% balance transfer. This means if you have a large amount transferred, it will be a long time before you can make your way down to the purchases and cash advances to knock those out. During that long wait time, those charges will be racking up big time interest rate charges. Thus, making any cost savings from the transfer null.
What else should you watch out for when it comes to 0% balance transfers?