We’re almost a month past the holidays, but credit card debt continues to be a nagging reminder of last season’s generous spending. To combat residual debt, many consumers have considered the option to transfer credit card balance amounts onto zero-interest credit cards as a way to avoid excessive interest charges.
January is a high season for credit card promotional offers from companies vying for new business. As a result, credit card holders have an abundant selection of terms to choose from when determining how to pay off credit card debt quickly.
However, before picking-up the phone or sending in a completed credit card application, you should understand the pros and cons of performing a balance transfer, as there are a couple of traps debtors can fall into if not careful.
Why Transfer Credit Card Balance?
Introductory 0% APR balance transfer cards are created as incentive for those with existing credit card debt to move their existing balances onto a new card. Often, this means credit card holders can save significantly by avoiding interest fees during the intro period. Customers have a golden opportunity to pay-down debt in less time.
For those with scattered debt, transferring credit card balances into a single account can save time, money and aggravation. Keeping up with just one monthly bill allows card holders to manage payments more efficiently.
With so many advantages to credit card balance transfers, it’s easy to see how people are persuaded to take the plunge without a second thought. However, there are aspects of balance transfers that are, at times, overlooked by credit card users who are too easily swayed with a 0% APR.
Credit Card 0% APR Balance Transfer Red Flags
When an offer seems too good to be true, it’s a strong indication something could be hidden behind the curtain. Credit card 0% APR balance transfer campaigns entice consumers with the big, flashy fonts showcasing the stellar interest rate. However, the trickier aspects of balance transfers lie within the fine print.
Balance Transfer Fees
Most credit card balance transfers charge customers a “balance transfer fee,” which is typically about 3 percent of the total transferred balance. Depending on the desired transfer amount, this fee alone could cost hundreds.
Another fee that card-swipers often overlook is an annual fee or membership fee. These charges are applied to the credit card account each year, regardless of how the credit card is used or the existing balance on the account.
Temporary Interest Rates
In addition to possible hidden fees, 0% APR credit card offers are only available for a limited time. Credit card companies offer a low interest rate for an introductory period. When it’s over, the card holder is charged a much higher rate. For example, a mail-in credit card offer can promote 0% APR for six months, with 20.99% variable APR thereafter.
In the scenario above, transferring a $10,000 balance onto a new card may be more of a disadvantage than a benefit, as paying off such a hefty debt within six months would be more than a challenge. Further, once the introductory six month period is over, customers are crippled with a 20.99% APR rate that will only push credit card users deeper in debt.
New Charges
Some credit card users experience a euphoric sense of freedom when they transfer credit card balances. However, what often goes unnoticed is that when new charges are made on a transferred balance credit card, payments are made toward the original transferred balance, not the new charges.
In other words, as customers pay off their credit card, companies apply that payment toward the 0% APR balance, and allow new purchases to accumulate interest charges until the whole transferred balance is paid off. This practice enables credit card companies to make money off of your new purchases for a longer period of time.
Despite these drawbacks, transferring a credit card balance can prove beneficial if executed properly.
Transfer Credit Card Balance: Will It Help You?
When deciding whether to take the leap by transferring credit card balances, consider factors like how large the balance amount will be and evaluate the offers available.
Kevin Lee of Los Angeles, CA had to weigh his options when transferring a credit card balance:
“I considered the 1.9% APR instead of the 0% APR, since the 0% APR ended in 12 months and the 1.9% APR was for 3 years.”
Reasonably measure how long it will take to pay off a balance, and select a credit card deal that not only offers a low interest rate, but also a forgiving introductory term period–when it comes to credit cards, it’s not always about the APR.