If you’re considering a zero-interest balance transfer credit card as a means to get out of debt — which can be a vert smart idea — it’s still wise to read the fine print. While it’s true these offers can extend zero interest for anywhere from 12 to 21 months (0% APR simply means your annualized percentage rate on that credit is zero, nada, zilch — it’s free credit), a few caveats and “gotchas” can ruin the deal if you aren’t careful.
Signing up for a 0% balance transfer credit card is no guarantee you’ll get that rate for the long haul. One false move and you could be back in the thick of it with a huge APR and no end in sight. Of course, any potential problems can be avoided if you know what they are – and how to avoid them.
Six Facts About Zero-Interest Credit Cards
Here are six facts you should know as you explore 0% APR credit cards and consider pulling the trigger:
Fact #1: Most cards apply 0% APR to purchases or balance transfers, but not both.
Before you get that 0% APR credit card, make sure you understand how your promotional rate works. A lot of times, the best balance transfer cards extend 0% APR to the balance transfer itself, but not to purchases. Then there are other cards that offer 0% APR on balance transfers for an extended length of time, but only extend that benefit to purchases for six months.
If you use your card to buy stuff while you pay down debt and don’t pay attention to your specific offer, you could be exposing yourself to more credit card interest unwittingly.
Fact #2: If you skip a payment, you might lose your balance transfer offer – or be forced to pay a penalty APR.
While transferring a high-interest balance to a balance transfer credit card can help you save money on interest and get out of debt faster, it’s crucial to make sure you never miss a payment. If you’re considerably late (usually 60 days or more), your 0% APR offer might be cancelled altogether. Worse, the Credit CARD Act of 2009 says you can be charged a penalty APR on your balance if your payment is at least 60 days past due. Since penalty APRs can surge as high as 30%, this is a situation you’ll want to avoid at all costs.
Fact #3: Your regular interest rate comes into play once your introductory offer is over.
There’s a reason cards offer 0% interest for anywhere from 12 to 21 months – they hope to lure you in and get you to pay interest once your introductory offer expires. If you don’t pay off your balance completely during your card’s zero-interest introductory period, that’s exactly what you can expect. Depending on the card, typical interest rates will fall anywhere between 5% and 24.9%.
Fact #4: Pursuing a balance transfer to pay down debt may ding your credit in the short term.
While paying off debt over the long haul is usually a boon to your credit, several of the moves made during a balance transfer can actually hurt your credit in the meantime.
First, let’s note that “new credit” makes up 10% of your FICO score. Because of this, opening a new account means your score might drop a few points temporarily.
Second, transferring a balance doesn’t make the debt go away. And if your credit utilization rate is still high — meaning the amount of your available credit limit that you’re using up — your score will inevitably take a hit.
The good news is, your score has the potential to improve as you pay down debt and improve your credit utilization rate. Remember, the amount you owe makes up 30% of your FICO score, making your utilization rate a huge credit factor you cannot ignore.
Fact #5: A balance transfer offer can’t get you out of debt on its own.
Many people assume they can transfer their high-interest balances and fix their financial lives in one fell swoop. What they don’t realize is, a balance transfer in and of itself will not fix your debt. It might save you plenty of money on interest in the short term, but you still owe the money, and your interest payments can come back with a vengeance once your introductory offer is over and your regular APR returns. For a balance transfer to actually help you get out of debt, you have to use the interest-free period you’re given to pay off your debts – once and for all.
Fact #6: You might pay a fee to transfer your balance.
While the Chase Slate® (currently unavailable) doesn’t charge a balance transfer fee for the first 60 days (after that, 5% with a minimum of $5), the vast majority of such cards tack on a fee equal to 3% to 5% of the transferred balance as a condition of your 0% APR agreement.
That means if you’re transferring a $10,000 balance to a 0% APR card and choose a card with a typical 3% balance transfer fee, you’ll owe an additional $300 on top of your balance. While these offers can still be well worth it when you consider the interest savings alone, it’s crucial to factor these fees into your long-term debt repayment plan.
A balance transfer offer isn’t the magical solution it’s sometimes made out to be. For these offers to benefit you, you have to follow the rules and take your debts seriously along the way.
With the right strategy, you can easily parlay a balance transfer offer into the debt-free future you deserve. But if you’re not careful, you could wind up exactly where you are now – or worse. Before you move forward, read the fine print and arm yourself with as much information as you can. Chances are, you’re going to need it.
- Best Balance Transfer Credit Cards of 2016
- How to Save Money with a Balance Transfer
- Five Steps to Take Immediately After Doing a Balance Transfer
Have you ever completed a balance transfer offer? Why or why not?
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