According to recent reports, consumers have been paying down their debt and tightening their purse-strings. But, for those of us (yes, me too unfortunately) that racked up a bit of debt over the past 12-months, zero balance transfer credit cards might be a great way to get out of debt.
Here’s what you need to know about those offers that might seem too good to be true:
- Balance transfer fees. Almost all balance transfer offers charge about a 3% balance transfer fee. So if you’re transferring $4,000 onto the new card, about $120 will be charged immediately to the card increasing your total balance to $4,120. It’s a good idea to pay off the fee right away, but if you can’t, work it into your total monthly payment to get it paid off before the zero interest rate expires.
- Zero interest has a time limit. Some of the best zero interest cards out there offer zero interest for 18-months. If you can snag that deal, make a plan to pay off the entire amount of debt within the time limit. Using the $4,120 in the above example, paying $229 a month would be the minimum payment you could make and pay off the card before the zero interest rate expires.
- Pay more than the minimum due. Credit card companies calculate the minimum monthly payment based on a percentage of the total debt. That minimum payment is much less than what you really need to pay to pay the balance in full before the zero interest rate expires. My example above of $229 is the minimum monthly payment it would take to get the entire balance paid off in 18-months, NOT the minimum the credit card company would calculate.
- Interest is charged on the whole amount, not just what’s left, come the zero-interest expiration date. To really benefit from zero-interest transfers, the consumer MUST pay off the entire balance transfer before the zero-interest rate expires. If they don’t, interest is calculated on the entire balance transfer, not just what’s left on the card. So, if you only have $600 left to pay off but you originally transferred $4,000 + $120 in fees, you owe interest for the entire $4,120 at the regular interest rate. That could be anywhere from an additional $600 on up!
- A good rule of thumb is to pay off the balance transfer a month or two before the zero-interest rate expires. Paying off the balance a month of two before the zero rate expires gives you a little wiggle room to make sure you don’t accidentally miss the expiration date. It’s also a great feeling paying off a card a little ahead of time while accruing NO interest!
There are a few great cards out there to choose from and CreditKarma.com can be a great place to start. Of course, if you’re in this position of having to transfer credit card balances to pay down debt you’ve accumulated, it’s time to really look at what you’ll do differently this year to keep debt to a minimum. I know that for myself, cutting back on household expenses will be my number one priority!
For those that don’t qualify to take on another credit card, other options for cash-strapped folks include debt consolidation, peer-to-peer lending companies (like Prosper or Lending Club), or borrowing money from family. Of course, each of these choices has pros and cons as well as consequences that need to be thoroughly investigated before making a decision. Whatever decision you make, taking that first step toward becoming debt-free is important.
Have you recently transferred a balance to a zero-interest rate card?
2 Comments
Sounds like a good deal. My wife and me are lucky that we don’t have any CC debt, but when we did, we played the balance transfer game like pros. It’s a great way to avoid paying interest, if you pay attention and do it right!
@TB – I like zero interest cards. I’ve used them in the past for large purchases and never paid a dime in interest. I guess you could say it’s for impatient, frugal people. 😉