Credit cards can be dangerous in some circumstances. We can overspend and we can get hit with more interest than we expected. Without close monitoring, they can get out of hand quickly. But guess what? Zero percent credit cards can benefit us quite a bit if we use them to our advantage.
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Many credit cards advertise balance transfer offers. Typically you pay a balance transfer fee of 3-5% and this gets you 0% interest for a set time period, usually 15-18 months. I have seen some offers as short as 12 months and others as long as 21 months. There are many factors to consider when deciding if this option is right for you, but it’s working for us.
We’ve used several balance transfer offers to save on interest as part of our debt payoff strategy. I’m thrilled to be saving interest and paying off more of our actual debt balance.
Transfer 1: We started off transferring $5,300 from another credit card that was at 16.49% interest to the Discover It card. When we signed up, the offer was 0% for 14 months. We had to pay a 3% balance transfer fee (about $160), but the interest savings was worth it. We were paying over $80 a month in interest, so we broke even after only 2 months.
Transfer 2: Next we transferred our Home Equity Loan to the Barclay Ring Mastercard. It looks like they don’t currently have a 0% offer, but we were lucky enough to get 0% interest for 15 months and $0.00 transfer fees. This took us from an interest rate of 6.54% down to 0% on the $8,264 balance.
Transfer 3: Last month we moved our smallest private student loan (about $21,000) to two different 0% credit cards. We get offers all the time, but I usually ignore them. I decided to check it out once I saw that one card was offering $0 fees and another card was offering only a 1% fee. It only cost us $100 in fees, and we were paying close to that EACH month in interest. We moved from a 5.66% variable interest rate to 0% for 18 months. This change will save us close to $1,500 in interest!
- Interest Savings – You can save THOUSANDS of dollars by moving high interest debt to a 0% interest rate. This is the benefit I am most interested in. Once I actually started paying attention to how much interest we were paying, it made me really mad. We have been throwing money down the drain for years.
- Payoff Deadline – Most balance transfer offers are for a set time frame. At the end of that time frame, you will start paying interest. This can be a GREAT motivator to really hustle to get your balance paid off. I am determined to have our debts paid before the promo interest rates expire, so I will do whatever it takes.
- Actually Reducing Debt – It can be really hard to stay motivated to pay off a credit card when you see that more than half your payment is going to interest. We always felt like we were just treading water. At one point, we would make a payment and then turn around and use the card again because we didn’t have any money left after we made our payments. Cutting out the interest allows you to actually reduce your balance, and that feels great. As your balance goes down, your motivation goes up.
- Convenience – If you have multiple cards, you can also use the balance transfer as a way to consolidate your debt into one payment. The easier you can make it to manage, the more likely you are to stick with it.
- Improvement to Credit Score – In the long run, a balance transfer may help you improve your credit score. On time payments are a huge part of your credit score. Reducing your overall balances and utilization will help too.
Let’s get real. Credit card companies aren’t trying to make friends. They are not giving these offers as a form of charity. Of course they know some people won’t pay their balances off in time to avoid interest. Some people will pay them off in time but remain customers. There is definitely something in it for the credit card companies, but balance transfers can also mean big savings for you IF they are used correctly. It’s up to YOU to pay off the balance during the promo period if you don’t want to pay interest.
- Charging on the original card – Once you transfer a balance to a 0% card, DO NOT continue charging on the old card. Keep the card open to help your utilization ratio, but do not use it. Freeze it or cut it up if you have to, but stop using it. This is probably the biggest risk with opening a new account. It is SO easy to fall into the trap of spending on a card that now has a $0 balance. Do whatever you have to do to avoid this situation.
- Not paying the balance off in time – Depending on your situation, you may not be able to pay your balance in full before interest kicks in. Ask yourself the tough questions. COULD you pay it off if you made different choices? Does the 0% interest make you feel like it’s not as urgent to pay it off? Be sure to check out what the interest rate will be once your promo period expires. Presumably, your balance will be much lower at the end of 18 months than when you started. This means you’ll be paying interest on a lower balance, but it’s still something to consider.
- Negative impact on credit score – In the short term, your credit score may take a hit when you open a new account or if your utilization ratio becomes too high. Our credit score dropped when I moved the student loan balance to the 0% cards, but I don’t care right now. It will be a short term hit, and my score will be even better in the end when the debt is paid off.
- Difficulty qualifying – Some cards require good or excellent credit ratings to get the best balance transfer offers. This can make it tough if you have a rocky past but are trying to change your situation. Do some research to see what credit scores are generally required for specific cards. Credit Sesame and Credit Karma are both free services that allow you to monitor your credit score. They also recommend the cards that are right for you based on your credit score.
- Penalty Rates – Some promotional offers have stipulations that you could lose the 0% rate if you are late on a payment. One of the easiest ways to hurt your credit score is with missed or late payments, but this could be even worse. You could lose your 0% rate and be subject to a crazy high interest rate. The bottom line is that you NEED to pay on time.
Other Factors to Consider
- Transfer must be from different bank – Most banks will not allow you to transfer a balance from one of their cards to another. I have two Citibank Cards, and I would not be permitted to transfer the balance from one to another.
- Transfer Fees – Not all balance transfer offers are created equal. Be sure to examine the fine print so you know what the transfer will cost you. Most cards charge a 3-5% balance transfer fee, but sometimes you can find offers with a 0% or 1% transfer fee. Many times the transfer is worth it even with the fees, but be sure you consider this when making your decision.
- Deferred Interest – Most major credit cards will only charge interest on the balance remaining at the time the promo rate expires. However, some financing plans such as furniture store cards or medical cards may be considered “deferred interest.” That means they will charge you ALL the interest accumulated since the date of the charge if the balance isn’t paid by the promo expiration date. If you can’t pay off a deferred interest card before the rate expires, transfer the balance to a 0% card or you could get hit with a huge interest charge.
- Type of Debt – If you have high interest credit cards, I would definitely consider transferring them to a 0% card if you are able. If your debt is some other form of loan, it might be a harder decision. You could sacrifice insurance protection (credit life, credit disability, etc) if you have that on your loan. With federal student loans, there are many payment options and even some protections that you would give up. You run the risk of ending up with a higher rate IF you don’t stick to your plan and pay off the balance during the promo period.
Balance transfer offers can be a huge help, but they are dependent on our behaviors! If you are committed to paying off debt and use these offers responsibility, they absolutely can help. However, if you haven’t fixed the issues that led you to getting in debt in the first place, these cards could make your situation even worse. Applying for more credit won’t fix a spending problem or a money management problem.
We are completely committed to our debt repayment plan. It might seem risky to convert a home equity loan and a student loan into credit card debt, but the interest savings is worth it to us. We are ALL IN. Two years ago this might have been a bad decision for us. Thanks to YNAB and Undebt.it, we feel completely prepared to work the system to our advantage as much as possible.
I want to hear from you! What do you think about 0% balance transfer offers? Yay or Nay?