The Dangers of Promotional 0% Interest Rate Credit Card Balance Transfers

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?

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Last Edited: February 16, 2011 @ 11:18 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. You might want to provide some more details about the “paying off too early” thing. When I first read it I read it as there being penalties for doing so. Most people do these transfers because they don’t have money to begin with. I see your line of thinking, but I was confused for a second.

  2. ben matulich says:

    the real danger is being in the dollar or fiat currency in general, gold is the way to go

  3. I’m with the weakonomist on this one. The part about paying it off too early almost makes it sound like there could be penalties enforced by the card issuer. Not the fact that if you pay it off before the 0% intro rate is up that you wouldn’t be gaining any intrest on that money in a savings acount.

    Otherwise great post!

  4. I wish my wife had read this post before I did all my balance transfers! She charged something dumb to one of the cards I did the 0% transfer to. I get an interest payment every month for .50 – literally 50 cents until that last $3,8000 is paid off.

  5. @weakonomist and MK – yeah, I could likely beef that section up to explain that better. thanks for the feedback.

    @ben – dude. gold has nothing to do with this post. if you want to talk about gold in the comments of every post, then might i suggest you write me a guest post and I’ll share it with everyone.

    @My Journey – yeah, that’s the thing with these transfers. so much that can trip you up.

  6. I was a bit confused as well when I first read the “don’t pay off too early” bit of advice, but I understand now what you mean. I have one question, however, is there a penalty if I want to take advantage of the %0 on balance transfer and make a second balance transfer before the period expires? I made a balance transfer back in March and the %0 period will be up on June. Would making another transfer balance at %0 be advisable? Is there a penalty?

  7. If you’re unable to pay off the balance by then, AND you can find a nice balance transfer deal without a big fee, then, yes, making a second transfer probably makes sense. And there should not be a penalty (I’ve never heard of this). All the old card company knows is they’re getting paid. If you want to be extra careful about this, ask the new card company to simply deposit the balance transfer amount in your checking account. Then, just pay the old card off with the money. Thanks for asking, and good luck with getting rid of the debts.

  8. I have a quick question. What happens if someone close the credit card which he has posted the balance transfer to before the promotional offer expires and before paying it off completelely.
    Will, this person benefit of the locked promotional rate until it’s paid off although he won’t be able to use the account since it’s closed or the promotional offer does end even if the cc is closed and the balance then gets the new APR in effect after the promo? Thanks!

    • To my knowledge, a cc company won’t let you close down an account with a balance on it. They could shut the card down, but that would only prevent future spending, not change the terms. Check with your credit card company before making any moves like this.