When Balance Transfers Are a Good Option
To transfer or not to transfer: that is the question. It can be expensive to carry credit card debt, so when you're offered a new card with zero percent interest on transferred balances, it can look like the perfect solution to your short-term goals. The wisdom of the transfer depends on other terms of the credit card agreement and these are often found in the fine print.
Look Before You Leap
Credit card companies are very competitive, according to Scott Hannah, CEO and President of Credit Counseling Society, which offers free credit counseling and debt consolidation options. Credit card balance transfer programs offering 0 percent interest are one of the most successful ways credit card companies have of enticing new customers.
"These balance transfer programs can be a good option for consumers and help them to potentially save thousands of dollars in interest and eliminate their credit card debt sooner. However, before consumers take the leap and transfer their credit card balances, it’s important that they do their homework and always read and understand the fine print."
The Grace Period
Determine how long the zero percent interest rate applies — it's typically for six to 18 months. The "normal" interest rate kicks in automatically after that and it might be higher than the card you carry now. It's only a good idea to transfer a balance to a zero percent interest card if you realistically expect to pay it off before the grace period expires. Keep in mind, some cards retroactively add interest if you don't take care of the balance during the grace period.
Annual Fees and Transfer Fees
You'll obviously pay less interest with a zero percent rate than you pay now, but that's not the only consideration. Credit cards sometimes charge annual fees or balance transfer fees. Hannah recommends that you look for a card that has no annual fee and that doesn't charge a transfer fee.
The typical balance transfer fee is between 3 and 4 percent in the U.S. Transferring a $2,000 balance transfer would cost you $60 to $80. So do the math. Add the balance transfer fee to any annual fee there may be for the new card, then compare this to the interest you'd pay on the old card over the months it will take you to pay off the balance.
Check Out Interest for Purchases
Hannah also advises that you make sure the credit card's zero percent interest offer applies to charges as well as balance transfers. If not, you might want to reconsider the transfer. "Some cards offer a promotional zero percent on balance transfers, but not on purchases. They also require that you pay off the amount you transferred first," Hannah says.
This means that if you use the card for purchases, you'll be paying interest on them for a long time. "Your regular monthly payment will go toward reducing the $5,000 balance transfer first," explains Hannah. "Interest will apply to all other purchases and will continue to accrue at the 'normal' interest rate each month until the original transfer balance is paid off."