Plenty of cards promise to help you move on from holiday debt by transferring your old balance and enjoying 0 percent interest for up to a year or more.
Done correctly, balance transfer offers can help you cancel out debt quickly. Used irresponsibly, however, they may not be the fresh start you’d hoped for.
“Give yourself a good reality check,” says Rod Ebrahimi, CEO and co-founder of debt management site Ready for Zero. “Having a 0 percent interest rate can give you a head start in paying down debt. But if you’re not ready, it’s probably not the best idea.”
To make sure you’re ready, know these seven things about balance transfers:
1. How much balance transfers really cost you
Zero (as in 0 percent) may be an enticing number. But there are other numbers to consider.
- The balance transfer fee: Most balance transfer deals, with the occasional exception, charge you to move your balance. Generally this fee is a percent of the balance – 3 percent for many cards on the market.
“So if you’re transferring $10,000, even if it’s just a 3 percent fee, that’s $300,” says Mike Sullivan, director of education at credit counseling organization Take Charge America.
- The monthly payment: Coming out ahead in a balance transfer means paying off your debt within the 0 percent period – and making only the minimum payment each month won’t cut it. For example, given a $10,000 balance transfer and a six-month intro period, you’d have to pay a whopping $1,600 a month.
“So the first question you have to ask yourself is, ‘Can I pay this off during the 0 percent interest period?'” says Sullivan.
- The default interest rate: If you do run down the 0 percent interest clock, you’ll be charged the card’s default rate, which might be even higher than the rate you had on your old card.
2. Making repeated balance transfers is a bad plan
If you fail to zero out your balance the first time, shuffling the remaining amount to yet another card can unleash additional costs.
Unless you time things perfectly, you’re probably going to pay a month or two of interest as you plan your next transfer, Ebrahimi points out. Plus, you’ll have to pay yet another balance transfer fee.
“Or maybe the economy shifts, and you can’t even get another 0 percent offer,” Ebrahimi says, which leaves you stuck with whatever high interest rate the balance transfer card reverts to. “So that one transfer cost you a lot.”
Therefore, before you make that initial transfer, ask your current bank if it will lower your APR. A Sept. 2014 survey from CreditCards.com found that 65 percent of consumers who asked for a rate reduction received it.
“You could call your current bank and say, ‘I’m trying to pay this down, could you help me out?’ That might end up being less expensive than getting into the game of balance transfers,” Ebrahimi says.
3. You can lose the 0 percent deal if you mess up
If you violate your terms (by paying late, for example), your issuer can end your 0 percent period early. For example, here are the terms on the Chase Slate card:
Notice that you won’t just get hit with the default APR, but with the penalty APR – an even higher interest rate reserved for those who run afoul of their card agreements. Expect something near 30 percent.
4. You may not get the terms you want
An advertisement for a card that offers 0 percent on balance transfers for 14 months might seem like the answer to all your problems.
However, “just because you see an ad, it’s not a guarantee you’re going to get that card with those terms,” Sullivan says.
Even preapproved mailed offers may not be a slam dunk if your credit has recently changed. You might apply for a card only to get a shorter balance transfer period than advertised — or a credit limit that’s not high enough for your entire balance. Worse yet, you’ll have a new credit inquiry on your credit reports, which can lower your score.
“That can be very disappointing,” Sullivan says.”… Now you have this card that doesn’t take care of your needs, and it’s going to be even harder to get a card that is useful to you.
5. Multiple balances create complexity
Balance transfer cards are still credit cards; you can use them to make purchases. That means you’ll have two balances and possibly two APRs on one card: your transferred balance (at 0 percent) and your purchase balance (at whatever rate the issuer gives you).
The CARD Act of 2009 stipulates that payments in excess of the minimum be applied to the balance with the highest interest rate. So you may think your large monthly payment is chipping away at your transferred balance when, in reality, your bank is applying it to that computer you just bought.
Or perhaps you have the opposite problem: You’re paying only the minimum, thinking it will go toward your purchases (which have a higher interest rate), when your issuer (which can apply minimum payments any way it pleases) is applying it to your 0 percent balance.
So monitor your account statements to find out how your payments are being allocated. Or better yet, don’t use the balance transfer card for purchases.
“I usually tell people don’t carry that card,” Sullivan says. “Cut it up, so you’re not tempted to use it.”
6. There are other options besides cards
Both Ebrahimi and Sullivan recommend looking at unsecured personal loans (such as debt consolidation loans and signature loans) as an alternative to balance transfer cards. While these loans don’t offer 0 percent intro periods, Sullivan has seen such loans with APRs under 10 percent. There are other advantages, too.
“The term is fixed, there’s no transfer fee, and you can’t spend more on a loan like you can with a card,” Ebrahimi says. “If you have good enough credit, that’s a better option than a 0 percent offer.”
Plus, Sullivan points out, having a loan (in addition to cards) on your credit report can increase your credit variety, helping your score.
The catch? You have to have good enough credit. A credit score of above 720 should be enough for a modest loan (up to $10,000) at a good rate, Sullivan estimates. And your current bank or credit union is probably a good place to start.
“You probably already have an established record with them, and maybe established credit,” Sullivan says. “But you’d probably want to research online to make sure you’re getting a competitive rate.”
7. Balance transfers can become a debt snooze button
Just because a card gives you a cushy 0 percent period, don’t use that as an excuse to drag out your debt.
“If you take 12 months to get rid of your debt, you wind up in the same situation next season,” Sullivan says. “You have to go out and charge your holiday expenses again. If you don’t build in some time to save, you’re in trouble.”
So rather than focusing only on getting a good balance transfer deal, make sure you have a realistic debt-payment plan.
“A lot of people focus on, ‘Oh, if I can just get a better rate,'” Sullivan says. “The interest is important, but you can’t borrow your way out of debt. You have to have a way to pay it off.”