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Credit Card Balance Transfer Advice

Credit card companies looking for new customers. Zero percent balance transfer offers are therefore a loss leader for the credit card industry. These below-market rates are offered in exchange for getting new cardholders who may use the card and other services for years to come.

Are 0 percent offers a good deal for consumers? The answer is yes but only if they are used correctly. Credit card balance transfer offers can help consumers get out of debt more quickly because interest rates are substantially less. Rates that last for 18 months are offered by Discover and Citi. Chase offers a 15-month zero percent balance transfer, while a bevy of card issuers offer 12 months with no interest. Some cards offer transfers for the life of the balance, but these offers come with interest rates in the single digits.

In some cases, a card will offer what is called a no fee balance transfer. These offers typically charge a low interest rate, perhaps 4.99 percent, rather than no interest.

Many transfer cards also come with additional perks. The Discover It and Chase Freedom cards, for example, offer up to 5 percent cash back on purchases.

There are times though when even a 0 percent credit card interest rate is not the best option. For those considering a balance transfer credit card, five factors to evaluate before taking the offer are:

  1. Balance Transfer Fees. Virtually all 0 percent balance transfer offers carry a transfer fee. The standard fee with most cards is 3 percent of the amount transferred. Some cards, however, charge as much as 5 percent. Usually, these offers are still a good deal even with the fee. Three or five percent is generally a lot less than the standard interest rates charged by most cards. For those with low balances that can be paid in full in just a few months, the balance transfer fee is exessive.

  2. More Debt. Transferring debt from a card carrying a double-digit interest rate to a 0 percent card is a no-brainer. The problem is that some consumers transfer their debt and then rack up more debt on the old card. The result is more debt. For those who believe this is a real possibility, it may be better to pass on the 0 percent offer and instead pay off the existing debt.

  3. Amount of Debt. There are better options than a balance transfer card in some cases. For small amounts, it may be easier and less expensive simply to pay off the debt in a couple of months. For larger amounts, say $10,000 or more, a balance transfer may likewise not be the best option. The problem is that credit limits on balance transfer cards may keep you from transferring all or even most of your existing debt. One option is to apply for multiple cards, but juggling multiple cards can be a hassle and it still may not cover 100 percent of the debt. 

    Another option is to transfer just a portion of the debt to 0 percent cards. You could also use a home equity line of credit, or use a personal loan to cover all of the debt if possible. While these lines of credit do not offer 0 percent interest rates, the rates are typically much lower than the regular APR of most credit cards.

  4. Credit Score Impact. Applying for a new credit card can lower your credit score, but just temporarily. While inquiries are not the most significant factor in credit scoring formulas, they still count. You may want to avoid applying for new credit, particularly if you’re about to apply for a mortgage. A credit score can have a significant effect on the interest rate of a new mortgage so consumers should do everything they can to protect their score in advance of applying for a home loan.

  5. The Other APR. Zero percent introductory offers don;t last forever. It’s important to understand what the interest rate will become once the introductory rate expires. In some cases, the regular APR may be substantially more than your curent interest. If that’s the case, there are three alternatives to consider.

    First, pay off the debt in full before the introductory rate comes to an end. While this avoids the sticker shock of the regular APR, not everybody will have the means to retire their debt quickly. Second, you can continue to roll over the debt from one balance transfer offer to another until the debt is paid in full. The risk here, however, is that there is no guarantee that 0 percent offers will be available when needed. Finally, it may be better to avoid the 0 percent game altogether, particularly if the current rate on your existing card is reasonable.

The key is to do the math ahead of time to determine the lowest cost option for you.

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