The offers in the mail are often tempting: Open a new credit card that offers a zero percent interest rate, and transfer your balance from higher interest cards to save money. It seems to be a no-brainer. Transferring a balance of several thousand dollars from a card with 12 to 15 percent interest to one that won’t charge any interest at all can save you hundreds, if not thousands, of dollars over time.
But before you happily sign up for the card, there are a few things to consider. Making one (or more) of these common mistakes will essentially negate the value of the zero interest offer, and could end up costing you more in the long run.
Forgetting Your Credit Score
Every time you apply for and open a new account, that information is recorded on your credit report — and causes a deduction of points from your score. If you already have excellent credit, a dip of 5 to 10 points isn’t tragic, and once the inquiry falls off your report in 12 months, it won’t affect your score at all. However, if your score is already on the lower end or borderline, those points will mean more, and if you are planning on applying for a mortgage any time soon, could affect your interest rate. So before you sign up, carefully weigh the benefits of the card against the effects on your score.
Not Reviewing the Fees and Future Interest
Most zero-interest offers are temporary, lasting only six months to a year. Once the promotional period ends, you’ll be charged interest on card’s balance. If you plan to pay off the card before then, that’s not an issue, but depending on the post-promotional interest rate, it could become a very costly issue. Read the fine print to learn the rate after the promotional period and compare it to your exiting cards. Again, unless you pay off your transfer during the no-interest period, you could end up paying a lot more than you would have otherwise — and you’ll be paying interest on your purchases twice, since you’ve already been charged interest on your purchases on the first card.
It’s also important to be aware of balance transfer fees. Some cards do not charge a balance transfer fee, but others tack on a fee of 3 to 5 percent of the transferred balance — potentially adding hundreds of dollars to your bill. This will negate most of the zero-interest benefits, so read the fine print.
Not Understanding How Payments Are Applied
If you receive a zero interest balance transfer offer from one of your existing cards, pay close attention to interest rates and how payments are applied to ensure you’re getting the best deal. Keep in mind that when you transfer a balance from one card to another card that already has a balance, any payments you make are first applied to the portion of the balance that has zero interest, while the existing balance continues to rack of finance charges. Once the promotional period ends, your payments will be applied toward the total balance.
Therefore, it’s important to pay close attention to the interest rate that will take effect after the promotional rate ends, and the rate of the card you are transferring the balance from. If the card that you are transferring from has a lower rate than the non-promotional rate on the other card, you risk paying more in the long run, because your payments in the promotional period will not lower the existing balance. Of course, you can avoid all of this by paying the balance in full.
Not Having a Payoff Plan
Again, the best way to avoid paying interest at all is to pay the balance in full each month. To get the most from a transfer to a no-interest credit card, you need to have a plan in place for paying off that balance before the promotion expires.
The whole idea of transferring your balance to a card with a lower rate is to save money while paying off the balance, so it simply doesn’t make sense to make only minimum payments and keep a balance one the promotion ends — especially if you have paid a transfer fee and/or the regular interest rate is higher. If you are going to make a transfer, make a plan to pay it off, so you can enjoy the benefits of getting the new card.
Transferring your credit card balance to a new card with zero interest can be a savvy financial move, but only if you make smart choices and avoid the mistakes that will cost you more over time. Be sure to read all of the disclosures and calculate any potential savings before opening any new accounts.