(The following is a guest post)
You open the mailbox to find a yet another credit card offer with “0% BALANCE TRANSFER!” printed across the front in a rather startling font. It happens as often as once a week, but this time, you’re not so skeptical because you’ve got a big debt to pay off, and your current card is charging you an excessive amount of interest. Should you go for it?
This is the dilemma of many consumers who are searching for a way to pay off debt before the interest alone crushes them. Zero percent interest on a credit card can seem like a good deal, but is it really worth it? That answer depends on your financial situation. If you are thinking of making a major purchase in the future, aren’t satisfied with the amount of interest that your rewards card is costing you, or if you are deep in debt and can no longer afford the interest payments on your current card, the zero percent balance transfer is a great financial tool that can help you get ahead of the ball. But usually, there are some “gotcha” details to look out for.
A zero percent balance transfer may sound like a good idea, but it’s important to remember that a company wouldn’t offer this kind of deal unless there was something in it for them. And usually that “something” equates to big cash. Here’s how they make money off of your balance transfer:
The primary goal of offering a zero percent balance transfer is to sign up new credit card customers. However, it doesn’t end there. Companies know that most of these new customers will not be able to pay off their balance in full before the promotional period, which is usually a year or less, ends. Once they’ve got you locked in, there’s a good chance that they will raise the interest you have to pay on that balance to a less enticing rate.
These companies may also start charging you interest right away, just not on the balance that you are transferring. The biggest advantage of credit cards is convenience, meaning that once you have that card in your purse, you’re more likely to use it for new purchases. Credit card companies often don’t extend the no-interest offer to anything that you charge on the card after your balance transfer. Additionally, the company is likely to use your payments to cover the transferred balance before the new payments. This means that while you’re toiling away to pay off the debt you’ve accumulated, your new purchases are steadily accruing more and more interest.
Finally, just because there is no interest fee on your transfer doesn’t mean that there aren’t any fees, period. With these kinds of cards, you’ll usually acquire a transfer fee, which is around three percent. However, some cards may charge much more than that, so make sure to read your offer details before applying.
This is not to say that balance transfers to new credit cards are all bad. In fact, they help many card customers save hundreds of dollars in interest payments as they work to pay off their debt. The trick is to know how to use these offers to your advantage, not the credit card company’s. If you make sure to read the fine print and strategize how you will pay off the balance before the grace period ends, you’ll have pulled one over on your credit card company, which is the best kind of consumer success story.