The holidays are almost over and you’re not happy with the 10 to 15 extra pounds of happiness and delight you gobbled up over the past month and a half and you know you’re going to have to do something about that, but right now that is not what is keeping you up at night. Right now you are more worried about the credit card debt that you, like most Americans, piled up with your generosity of heart and gift giving. You want to do it differently this year and not be paying off your debt in October, just in time to start the process all over for next year.
Thinking like this is what makes a lot of people turn to 0% interest credit cards thinking they may be the answer to their debt reduction woes. But is the appeal of a 0% interest balance transfer really all that beneficial? And more importantly are there negatives that come with those enticing 0% interest credit card offers? To answer those questions, at CreditSense we take a look at the whole picture, diving past the surface appeal that a 0% interest credit card seems to bring to your wallet and giving you an honest look at the pros and cons of 0% interest balance transfers, so you can make a decision that makes good "credit sense" based on your financial situation.
As you now know from reading our other posts about credit card reward offers and credit card cash back offers in our CreditSense blog, all credit cards are not created equal. It is no different for 0% interest credit card offers. There will be a range of time frames the offers are good for, what type of transfers or purchases they apply to and maybe even more importantly, what the interest rate resets at after the 0% balance transfer period has expired. For example the Citi Platinum Select credit card offers one of the longest time frames for 0% balance transfers, giving you a comfortable 21 months at 0% interest. A major plus with the Citi Platinum Select is it also offers 0% interest on purchases for that same 21 months. There are a lot of credit cards that don’t offer the 0% interest on new purchases. Before we get too excited about 0% interest on new purchases though, keep in mind that an offer like that can quickly turn into the proverbial “double edged sword” if you are not careful. Many people make purchases they usually would not make because of the allure of 0% interest and the good intentions of paying it off before the interest rate resets. Almost all of us have had thoughts, and made decisions just like that in the past, and sadly, most of us know exactly the road that is paved with good intentions.
So on that cautionary note lets take a look at the pros and cons of 0% interest balance transfers.
Pro: You save money.
This is the obvious reason anyone looks into 0% balance transfers, but do you really get the bang for your buck? Mike Sullivan, director of education for Take Charge America, a Phoenix-based nonprofit consumer credit counseling company says, "The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate, including all your costs." Take a look at the tables below to get an idea of how much you will spend and how much you will save depending on your interest rate, balance, and the length of time the 0% balance transfer is available to you.
Con: You end up spending more money.
I touched on this above, but it is the number one killer when people, with good intentions, use 0% balance transfers with their credit cards. I could go through a ton of different scenarios how this ultimately plays out, but the bottom line is we repeatedly see that all roads lead to a few end results. The biggest problem we see is people not being able to actually pay off the balance in the time frame allowed. Then they have the same debt on a different card and haven’t really gained much ground. The second biggest problem is when a card offers 0% interest on new purchases, people spend money they wouldn’t normally spend and buy things they wouldn’t usually buy because they will pay it off before the 0% interest period expires. This is a good time to remind you of that road, you know... the one paved with good intentions. Over 90% of people who spend more with the intent of paying it before the interest free period expires do reach that goal and they end up carrying a higher balance than they originally transferred and owing much more money than they did when this whole process started. The third top problem we encounter is people transfer the balance to a new credit card with 0% interest and now they have their old card with a zero balance. For many people that temptation is just too great and they start using the old card again. Now they have double the debt. Is your brain starting to hurt yet?
Pro: You consolidate your payments.
The other real positive of transferring balances to an account with 0% interest is it enables you to consolidate payments to one creditor. Not having to track multiple payments can take a little of the stress out of your life every month.
Here are some of the other potentially negative affects zero interest offers carry with them. Make sure you weigh all the variables mentioned taking into account your personal financial situation.
Con: You may hurt your credit score.
If you are trying to build your credit and get a higher credit score for a purchase like a new car or a new home, even small decisions like balance transfers can end up being big decisions later if they hurt your credit score building efforts.
How will acquiring a new credit card for a 0% interest balance transfer offer affect your FICO score? The new card causes a negative hit on your credit report when the new creditor send an inquiry to the credit bureaus checking your FICO credit score. If you are approved you then lower the average age of your revolving account portfolio which in turn lowers your FICO score. Adding a new credit card might also move you further away from the “ideal credit profile” (add link to ideal credit profile post on our site once it is up) which lowers your FICO score and impedes your ability to increase your score over time having a long term negative impact.
Con: You will most likely pay balance transfer fees.
Transferring an account to a credit card with a 0% interest offer isn’t simply moving money from one account to the other. You will most likely be charged a balance transfer fee, which is determined based on the total amount you are transferring. In the past, most transfer fees were capped at a maximum of 3 percent of the first $1,000 transferred, or 3 percent of the balance up to $75. Today many cards have lifted the cap. If you transfer a $10,000 debt from another card, you will pay $300 in fees immediately. Whether paying the fee is worth it depends on how much money you will save on interest before your 0% interest offer expires, and how much your interest rate resets at. It is possible that your 0% interest offer ends up costing you more money in the long run.
Con: Your payments may be funneled toward the 0% interest transfer first.
Many credit cards require you to pay off the 0% interest transfers or purchases from your balance before they will apply any payments toward higher interest purchases or balances. This means you could spend up to 21 months paying against 0% interest transfers and during that time your higher interest purchases have been untouched by your payments and have been accruing interest at whatever your regular rate is. This does not happen with every card, so make sure you read the fine print.
Some other things to consider with a 0% interest balance transfer are:
• How many months before the interest free period expires?
• Does the interest free rate apply to all transfers?
• Can you transfer other debts besides credit cards?
0% balance transfers can be amazingly helpful in your efforts to pay off debt faster and keep more money in your pocket. If this strategy is one you want to take advantage of, the Citi Platinum Select card is one of the best offers out there right now. Credit card companies have these types of offers because they know the majority will not pay off the new balances in time and they will still make money. If you use 0% interest correctly you are able to walk away from an offer like this with the satisfaction and confidence that comes from a wise financial decision and you ultimately end up on top financially. Always remember, when it comes to your credit and personal finances there is no single “right” way to do it. Your personal situation will dictate if a 0% interest balance transfer makes good "credit sense" for you.
What was your 0% interest balance transfer experience?