I remember the good old days when not only did I get tons of credit card balance transfer offers with 0% or 1.9% percent interest rates, but there was no balance transfer fee, either! Now I’m seeing few reduced-interest-rate offers, and most will cost consumers 3%, 4% or even 5% in fees based on the transaction.
I know a number of people — myself included — who used to shuffle balances around from 0% offer to 0% offer in order to not pay interest, back when there was no transaction fee. Some folks even used the offers to take out money on credit and use it to pay off car loans or even invest the money in certificates of deposit. Of course, that was back when the economy was booming and consumers were getting 5%-6% interest on CDs!
In the long run, it’s usually still worthwhile if you plan to pay off the entire balance before the balance transfer offer expires, which could be 4 months, a year or some other predetermined amount of time. Although you’ll pay some fees up front for the balance transfer, it’s likely to be less than the interest you’d be paying on a balance being charged at 15% or 20% interest.
You owe $3,000 on a credit card with an 15% annual interest rate. If you throw $300 monthly toward the balance (without incurring new charges), it would take almost a year to pay off — 11 months — and cost you $225 in interest charges.
With a 0% balance transfer offer, good for 12 months, which includes a 5% transaction fee, you’d pay $150 up front for the balance transfer fee. But you wouldn’t be paying interest, saving you $225 on that end. So overall, if you transferred that $3,000 to the 0% offer with the 5% transaction fee, you’d save $75 ($225 in old credit card interest minus the $150 transaction fee). And instead off 11 months, you’d wipe that debt in 10 months as long as you still make the $300 monthly payment you were making before.
Balance Transfer Offers Are a Ploy
The credit card companies aren’t being nice to their customers by teasing low interest rates under your nose — they want you to transfer a big balance and charge you that transaction-fee percentage. And they hope you don’t pay off the balance before the low interest-rate period is up. Then, you’ll be back to square one, with a balance that’s subject to the credit card’s prevailing interest rate, likely to be back to that 15% or higher rate you were at with the other credit card.
They just want your money, and they’re banking on you not paying off your credit card balance before the lower-interest rate offer expires!
Things to Keep in Mind
Not only will the credit card’s prevailing interest rate kick in once the balance transfer promotional period is over, there are other things to consider.
— If you transfer a balance to a credit card that you’re already carrying debt on, future payments will go toward paying off the lower-interest debt first. This means your original debt will still accrue interest at the higher rate. My advice is to only transfer balances to a credit card with no other debt on it.
— Only use balance transfer offer if it will help you pay off your credit card debt. Don’t just juggle balances from card to card, chasing low interest rates while making minimal payments. If you’re serious about getting out of credit card debt while minimizing the amount of interest you’re paying on the debts, then go for it.
— Miss a payment? Then you might be screwed in three ways. 1) It can damage your FICO credit score, 2) It’ll probably show up on your credit report as a late payment, and 2) You’ll lose that low promotional interest rate.
— Don’t cancel the old credit card. While it might make you feel better to close the account, it can potentially damage your credit score by eliminating relevant credit history. Instead, keep the old account active by charging a small purchase once a month — perhaps a tank of gas or a recurring charge, such as a Netflix monthly fee.
I don’t plan to use any balance transfers in the near future, as we don’t have much on our credit cards. After paying off all of our credit card debt, there were some unexpected expenses that we charged to a card to get some cash reward points, but the balance will be paid off by the end of October. And the current transaction fees on those balance transfers aren’t appealing at all.