0% balance transfer cards can be great for people in debt. Once they’ve become dedicated to paying it off, you can do so without it accruing more interest. But how do the credit card companies make money off carrying your balance at 0%? (And it doesn’t have to be 0%, it could be any low percentage.)
They make money because you slip up. Here’s how you slip up and how you can avoid it.
For starters, once you get the money on the card, they hope you’ll use it for other purchases. Those other purchases will not be covered by the low APR. Instead, you’ll be paying a much higher interest–sometimes 17%, 20%…
And the spending balance (at the higher interest) will just sit around and accrue until you pay off the balance transfer. Because credit card companies always pay off the balances in order with lowest interest first. So the 0% balance has to be paid off first, then the 17% balance.
It’s perfectly legal and completely customary. Not saying it’s perfectly right, but it’s common with most companies. If you’re really lucky, you might get a low rate on both, but it’s not guaranteed.
Then, even if you don’t put on a new balance, you may not pay it off in the right period. Some cards (and 0% financing offers from other companies) apply retroactive interest once the introductory period is over. So whatever’s left may be subject to 6 month’s or a year’s worth of interest on it.
Again, depends on the company.
Plus, you become loyal customers. Maybe you’ll start using that card for other things once the balance is paid off. Maybe you’ll just be used to them and be more likely to stick with them from inertia.
How you can win with a balance transfer:
First, don’t spend anything with your balance transfer card. If you get one, that’s all it’s for. Balance transfer—that’s it. I would advise against credit cards anyway…but if you’re going to use one, get another one. Pay it off at the end of each month to avoid accruing interest. The balance transfer won’t get interest either. (again, people with good credit may be able to get 0% on both…they’re hoping you won’t pay it all off in the promotional period.)
Second, make sure you pay the balance off on time. If you don’t, you’ll have to deal with the retroactive interest at the end of the period. Or look into another balance transfer card until you’ve finished paying it off.
Third, read your terms very carefully. Highlight the important parts—like what the interest in on different uses of the card (balance transfer, purchase, etc). Check when the promotional period ends.
These cards are even more of a double-edged sword than your normal ones. But they also have a greater potential payoff—you can pay down the debt faster and pay less to the credit card companies. Just remember that the blade is sharp on both sides. And don’t get cut.