5 Things You Should Remember about 0% Interest Credit Card Offers

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:

  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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?

  1. You have one credit card with a high balance that you cannot pay off for a YEAR OR LESS.
  2. 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.
  3. 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.
  4. 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.
  5. 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!

Before Your Kids Go to College, Think about This...

You don’t want your kids to be burdened with huge loans when they graduate college. That’s great, but you cannot handle the burden of the loans either. You have to then go to your children’s grandparents for loans or gifts to relieve the monthly student loan payment burden (usually between $700-2500/month). What would happen if you ask Grandma and Grandpa to help with education BEFORE junior goes to college instead of asking them for help after?

If you have two kids, and you have to take out $125,000 for their combined college tuition (i.e. 8 years of college), you, the parents are left with a monthly burden of about $1500/month in loan payments. Ouch! Now, you find yourselves unable to meet your monthly needs because of this loan payment.

You’re building a balance on your credit card, you spend more than earn each month and you’re spiraling into a massive liquidity crunch (that feeling of suffocation when you know you don’t have any spare cash for anything). You’re trying to cut back, but you just can’t cut enough and now what?

You go to your retired and thrifty parents (or in-laws) for help. They loan/give you the money to pay off those student loans. If you had the [fill in any body part here] to ask them to help with their grandchildren’s education in the first place things could look a lot different.

Maybe they did not have much money back when your children were small. Maybe they knew (because they read Lori Atwood’s blog) that saving for retirement should trump all other savings including education and they wanted to make sure their retirement was secure before offering to help with their grandkids college.

Those are both good points, but the bottom line is communicate with your parents and in-laws before your oldest starts applying to schools. It may not be comfortable, but a liquidity crunch is far more uncomfortable. Ask how much may be available to help. It does not matter if it’s not been saved in a 529 plan or they just help pay your child's tuition with monthly contributions.

If they can help you by decreasing parental or student loan burdens before you sign the papers, you could be better off by a lot. At 6.8% (typical student loan rate) on the $125,000 total loan example above, you’re already saving $47,000 in interest over the 10 year payoff period.

It is better to pay for something like education outright (whether you’ve been saving for years or you pay as you go) than it is to borrow in order to pay for it. Find your backbone today and ask your parents, in-laws or wealthy great aunts to help you pay for your kids’ college. Whether they contribute to a savings plan or help pay while your child is at school, it will be better than taking all the loans on yourself and needing to ask for help later.