It seems transferring balances to 0% credit card offers is the new black this year. I have a lot of clients who are doing it. In some cases, it makes a lot of sense to move high interest balances to a zero percent card offer to save on interest charges if you know it will take you a few months/years to pay down your balance, but here are few things to remember before you go transferring balances:
- They are exactly what they say they are: OFFERS. They expire. Know exactly when you interest rate will increase and to what interest rate it will go. Offers are usually good for 12-15 months.
- Most 0% offers have transaction fees attached. Read the fine print about how much you will pay just to transfer your balance (usually the higher of a couple percentage points or a flat rate).
- Most 0% offers will only let you transfer ONE balance or write one CHECK. Don’t be fooled into thinking you can transfer several balances onto one 0% offer card. You can’t.
- New charges to the 0% offer card usually carry a non-zero interest rate. If you transfer a balance and then use the card for purchases and do not pay the purchases off each month, you will be charged interest at some specified APR rate.
- You usually cannot transfer balances from a credit card from the same bank. You can’t transfer one Wells Fargo balance to a 0% Wells Fargo offer card.
So what is the best situation to use 0% offer credit cards?
- You have one credit card with a high balance that you cannot pay off for a YEAR OR LESS.
- You KNOW you have another credit card to use for monthly purchases that will be paid off each month and you do not have to charge typical purchases on the 0% offer card.
- You have DONE THE MATH and the transaction fee is less than the amount you will pay in interest on your existing credit card over the period it will take you to pay it off.
Example: Balance $5000 at 10% APR. You pay $500/year in interest. Transaction fees to transfer to 0% card costs 2% of the balance and you get 1 year at 0%. You pay 2% ($100) for that one year instead of $500 in interest. Transfer might make sense.
- It will take you more than a year to pay off the balance you are transferring, and the APR you have to pay once the offer expires on the 0% credit card is less than your current card APR.
- You know you can pay at least the minimum (of course, you should always try to pay more) on the 0% credit card ON TIME each month so you do not lose the offer and get bumped up to the APR.
There's a psychological component to this, too. Many people think it's okay to carry a balance as long as you're not paying interest. Mathematically, you are no worse off for the VERY short period where you do not have to pay interest, but it can lead to complacency, and forgetfulness.
You can get lazy about paying it down while it is 0% and you really haven't made much headway when the APR changes. You may forget to find another 0% offer to move your remaining balance to when your current offer expires and suddenly, you're paying 20% and you do not have the funds to pay it off.
Zero percent interest credit card offers can be very helpful in specific situations. However, for some people, it makes sense to keep your balance on your current credit card and focus on spending less than you earn so you have more to put towards paying down your balance instead of transferring it. Read the fine print and do the math!