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.
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Excellent advice! I think the most misunderstood part of those offers is the fact that your payments will go to the 0% balance before getting applied to any new purchases. More people need to understand how these cards work so they can use them properly.
I’ve heard many people complain about the way payments are applied. But one thing that many do not realize. Credit cards apparently have always been this way. My first credit card was in 1968 and I read the terms and this was spelled out. It is not new and it is not unusual. It is the way things have always been. The other thing that people get caught on is being late for a payment on their 0% card. Even being late one day can cause your 0% to jump up to the ‘normal’ rate. Pay early on these cards. If you can get a low apr card for balance transfers, they can be great
for paying off debt that has grown. They just have to be used knowing what you are doing. Also remember, most companies charge a fee to transfer a balance. Look for it or ask about it. It is part of the cost of doing this. People don’t expect it.
If you are late and lose your 0% rate, you can always try calling customer service to ask to have it restored. It may not work, but it is worth a try.
I would advise against credit cards anyway…
You are, I am sure, perfectly aware of the divide in the personal finance community about credit cards. Personally, I think they’re fine. I use my credit card for everything and pay it off each month. I’m a bit obsessive-compulsive so I wouldn’t even blink if they changed the due date on me (which they never have) and there’s no chance I wouldn’t notice. (I probably check the credit card’s website at least once a day. As I said, I’m a bit obsessive-compulsive.)
In exchange for this, I get a small amount of free “float” (I don’t play the credit card arbitrage game, but I still get about a month of float). I also get the rewards once a year (cash back) and I also build credit for myself and my wife (who is a joint cardholder). This last is fairly important. Some time ago, when we were getting utilities hooked up, they had to put them entirely in my name to qualify for the best rate because my wife had no credit history at all. (Though I’m sure there were “hoops” she could have jumped through if we didn’t have the simple expedient of putting everything in my name instead.) So we picked up a credit card in both our names, just to protect her in case something happens to me. (We’ve never needed her credit rating to qualify for anything since we never use her income to qualify for anything. But while my insurance will take care of her in the event of my death, it could cripple her access to credit, ability to take out a mortgage, etc.)
Having said all that, if you have any problems with self-control or temptation to overspend or anything like that, the risks far outweigh the rewards. Even if just the inconvenience of having to get out cash makes you less likely to impulse spend, then a credit card probably isn’t for you. (I literally never make impulse purchases.) But personally, I have had nothing but very good experiences with credit cards.
Thanks for this info Mrs M – I didn’t realise the 0% was on the transferred sum only, I just assumed it was on anything you purchased in the first 6 months. So, it looks like they’re not such a great deal after all.
I recently took advantage of one of these to get us through a pinch when we were doing some house renovations. It was great, but if I had made one slip up, it would not have been so great! I paid it off a month early, just to be safe.
As you say, if you follow the fine print rules, you’ll be ok.
Lisa
The only way to use these as your benefit is to do your balance transfer…then cut up the card. Before you ever transfer your money, divide the amount owed by months the offer is valid…and if you can pay that off each month WITH NO PROBLEM, then go ahead and do it…you’ve got to change your spending habits or you’ll never get ahead!
I like your advice, Veteran Military Wife, about dividing it up by months and figuring out what you should be able to pay. That should help avoid an extra balance at the end.
What a rip! And it’s interesting to know, from what Dad says, that this has been going on from Day One.
I got my first credit card about in 1966 when a neighbor put me up to taking out an application. She was working for the bank and got a commission for everyone she signed up to MasterCard. Not knowing what to do with it, I used it as a check-cashing card–in those days retailers wanted a driver’s license AND some other form of ID, and they would accept credit cards for the purpose. ID theft had not yet been invented.
Never charged anything on it, ’cause even then I could see that way lay bankruptcy. Eventually a MasterCard rep called me on the phone and asked winsomely what was the matter that I wasn’t charging things on my wonderful card!
LOL! Good thing I didn’t, apparently: I never read all that fine print Dad remembers so well.
That’s good advice. I’d like to add that if you’re not using 0% APR credit cards to pay off your debt, you can still benefit from them by borrowing the interest-free money and invest it. The most low-risk investment would be a savings account such as ING where you can earn around 5% interest.
I haven’t been able to find any of these 0% offers in Canada… the lowest is 1.97%… and I’ve used those and they are to my advantage.
I know some people who are debt free, with great credit, how get the 0% offers, take out large, large sums ($40,000 or so) and stash the whole thing at a 4-5% rate… it’s a way to make interest off the CC companies I guess.
Great advice Mrs.M, you bring up a couple of points I had not thought about in my post. I guess that means that you cannot use the CC with the balance transfer even if it not maxed out. I should make a note of that.
Nothing wrong with consolidation, as long as it leads to savings! Not just to get more credit!
Good advice. I did a post very similar to this a few months ago.
See http://bankergirl.com/archives/27
You really do need to read the fine print before accepting an offer from any bank that wants to refinance existing balances.
Hello Mrs M!
First thanks for stopping by my blog and leaving a comment. Second, thanks for the warning on these credit cards. I’m about to transfer a balance to Bank of America because they offered me 1.9%. I’ll be sure and check on the due date and will probably set up an automatic payment to insure I don’t slip up!
Thanks for bringing this to my attention. 🙂
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