How to Avoid A Major 0% Balance Transfer Credit Card Mistake
Published 3/16/08 (Modified 3/8/11)
Warning: Before you apply for a 0% balance transfer credit card offer, you need to read and heed the following words of advice. If you want to know how the actual zero percent balance transfer process works, please read this guide to making balance transfers as well - in tandem with the article below. Both will help better educate you regarding this powerful but rule-laden process.
Using A Balance Transfer Card As A Financial Safety Net
While some debt reduction pundits discourage the use of balance transfer credit cards, I respectfully disagree with their blanket rejection of this invaluable financial tool. While I concur that the use of credit cards is not for everyone and misuse can lead to out of control credit card debt, I think the responsible use of credit should be viewed as an integral aspect of debt reduction and sound financial planning.
I myself have relied and depended on 0% balance transfer offers in the past to get through periods of financial difficulty. There were several times in my life when I incurred major unexpected expenses that I was unable to financially cover on my own - examples such as large unanticipated tax bills and emergency car repair charges. Other times I simply did not have the cash flow available to pay off my monthly bills despite having a stable, entry level job at the time. Rather than resorting to something reckless like stooping for a high interest payday loan, I applied for credit cards that offered introductory 0% APR interest rates on 12 month balance transfers. With the infusion of instant money on 0% balance transfer credit, I was able to weather the financial storm, rather than relying on the charity of family or friends. Balance transfers help you bail yourself out of difficult times but still maintain that key financial independence, and doing so in a responsible and planned out way.
Using A Balance Transfer Card To Make Money and Profit
While I've used 0% balance transfer offers for emergency parachute purposes, I've also used them to earn free interest money. By depositing the 0% balance transfer funds into a high yield savings account, I was able to make money from what was essentially zero interest loans. Whether your need or want for credit depends on a single card or multiple card offers, the risks and pitfalls with balance transfers remain the same. Balance transfer cards are certainly very lucrative and powerful financial tools, but they have rules that must be followed and adhered to.
Here are some of the key mistakes and pitfalls to avoid, that all balance transfer enthusiasts must pay attention to. These are all key balance transfer components that have a high tendency to trip people up. Proper knowledge and credit education can help cardholders avoid turning their balance transfer lifelines into balance transfer disasters.
1) Some 0% Balance Transfer Offers Have Balance Transfer Fees - When you apply for a balance transfer offer, there are two important components you must find out - the balance transfer APR interest rate and the balance transfer fee, if any. The interest rate is the percentage rate that you will need to pay the card company if you carry an unpaid credit balance from month to month. With new introductory 0% balance transfer offers, the interest rate should be zero.
The balance transfer fee is the one time cost of executing the balance transfer transaction. The usual fee percentage is 3%, but many cards set maximum fee limits of $50-$75 for the one time charge. However there are some special balance transfer cards that offer 0% interest rates with no balance transfer fees. The terms and conditions of no balance transfer fee cards usually expressly indicate that pursuant to the 0% balance transfer offer, the transfer fee is waived. Those types of offers are perfect for consumers looking to transfer high interest debt to a zero percent credit card and for those looking to weather a financial emergency, because it's possible to avoid all upfront or subsequent fees completely. On the other hand, those looking to profit or make money from balance transfer arbitrage usually don't mind the balance transfer fees as much, because their goal is to maximize their total 0% credit line.
If you don't want to go through the trouble of examining the detailed fine print of all available credit card offers, I've done most of the work for you:
- List of All 0% Balance Transfer Cards - Includes a complete list of all 6-12 month offers with everything from 0% to 3% balance transfer fees.
- List of 0% No Balance Transfer Fee Cards - Only balance transfer cards with no fees are listed. The length of each introductory 0% APR period varies.
2) Keep Track of the Balance Transfer Duration and Expiration Date - Along with the interest rate and balance transfer fee, savvy consumers need to know and remember the length of the 0% introductory period. The length of most promotional offers is usually 6-12 months although the period varies based on individual card terms. The introductory balance transfer clock usually starts when the first balance transfer request is made. So long as there are no credit card term violations such as a late monthly payment, the 0% interest rate remains in effect for the duration of the promotional period. Once the transfer has been made, I highly recommend calling or emailing your card issuer to request the exact expiration date of the balance transfer. I suggest that you circle the target date on your calendar. I personally use my Yahoo email calendar function to set online reminders for myself a month and a week before balance transfer expiration.
3) Don't Make A Cash Advance Instead Of A Balance Transfer By Mistake - Do not make the very critical and significant mistake of requesting a cash advance rather than a balance transfer. While they may seemingly operate in similar ways, they are not the same. A cash advance is initiated when you cash one of those credit card convenience checks that the card issuer occasionally sends you, or when you use your credit card at an ATM machine to access your credit limit. Always avoid cash advances if you can because unlike 0% balance transfer offers, a cash advance usually has very high fees and high interest rates. If you make a cash advance, it effectively destroys the benefit of your introductory 0% balance transfer offer. Always make sure and verify that it is indeed a balance transfer being made, and not a cash advance.
It should be noted that certain credit card issuers like Citibank do issue balance transfer checks. Rather than requiring from you a credit card balance to transfer, Citibank will upon request, simply send you a balance transfer check for the entire balance transfer amount you request. The check can be deposited into any bank account you wish like any ordinary check. While it may resemble a cash advance convenience check, it is labeled and categorized differently.
3) Always Make Sure You Pay Your Monthly Credit Card Bill On Time - This point is absolutely critical. Should you accidentally or intentionally default or fail to pay your monthly credit card bill on time, your introductory zero interest rate will reset at much higher rates. Normal credit card interest rates vary, but they usually average around 10-20% APR give or take. The rate might not seem like a lot but when you are talking about balance transfers, imagine defaulting on a $10,000 balance transfer offer and suddenly having to pay back the entire amount immediately or face significant interest fees. Thus, you want to always make sure you pay off your minimum balance on time every month. I cannot overemphasize enough - Do not fail to pay or make a single late minimum payment. In the event you are late, there is a small chance the card issuer may be generous enough to restore your introductory 0% balance transfer rate as a courtesy gesture. It worked for me at least once in the past, but then again, I had a blemish free payment history prior to that.
I highly recommend setting up automatic debit payments to have the minimum balance instantly withdrawn from your linked bank account when the monthly balance comes due. Setting upon account alerts is also a smart idea. You should always review your monthly statement regularly to check for any unintended or unknown charges, just in case.
As an additional reminder, if you are transferring a balance from another credit card, make sure the old card's balance has been completely paid off and the bill has been set to zero before you stop paying it. Sometimes it takes a week or more for the balance transfer request to be made effective.
4) The 0% Balance Transfer Offer Does Not Extend To Purchases - While the credit card balance you transfer to the 0% card will carry the introductory zero fee rate, subsequent purchases using the credit card will not enjoy the same 0%, but rather will be applied towards the card's ordinary interest rate for purchases. If you are using the card primarily as a balance transfer card, I recommend that you remove it from your wallet and place it at home so that you don't accidentally use it to swipe a purchase. I always attach a "do not use" Post-It warning on my active balance transfer cards at home so I don't use it by mistake. If you are interested in credit cards that offer 0% APR interest rates for both balance transfers and credit purchases, you will need to apply for those that have that particular promotion.
- Here is a list of 0% purchase and balance transfer credit card offers that I've compiled.
5) Payments Are Applied To Lower Interest Charges First - Almost all balance transfer fine print will specifically indicate that payments made by cardholders towards their card balance will be applied to lower interest charges first. This means that when you make a payment, it goes toward the 0% portion of your credit card balance first, not the higher-rate portion for purchases. This is crucial because it is completely counter-intuitive and opposite of what cardholders would logically do.
Let's say you transferred a balance of $5,000, then made a purchase for $100. You will now be paying the regular credit card interest of 15% on that $100 item until the $5,000 balance is completely paid off. This is a balance transfer killer that you absolutely want to avoid since you will now be compelled to pay off the entire balance in full immediately or face recurring interest charges. If you want to make 0% interest purchases, then seek a credit card that offers 0% for both purchases and balance transfers.
6) Don't Rush To Pay Off Your 0% Balance - You should try to take the most advantage of the interest free grace period offered by the balance transfer offer by putting the extra cash in a high yield savings account. At the end of the 0% grace period, you should then withdraw the money from the bank account and use the accumulated money, plus the interest it has earned, to repay your credit card bill. After paying off the balance, there should be leftover interest money - profit from taking advantage of the 0% balance transfer offer.
7) Don't Cancel Your Balance Transfer Cards After The 0% Introductory Grace Period Is Over - While this one is merely advisory and not a crucial mistake like the ones above, I think there are a few solid reasons why you shouldn't cancel your card after the balance transfer period is over. You should keep the card active because sometimes the card issuer will try to attract you with another complimentary 0% no balance transfer fee offer. Another reason is that closing your card account has the noticeable effect of dropping your FICO credit score because it lowers your total credit line available, and increases your credit utilization ratio. If you insist on canceling the card, at the very least you should roll the credit limit onto another card by the same credit issuer. That way, while you reduce the number of cards, you still maintain the same credit utilization.
Follow The Above Rules, And You Will Succeed With Balance Transfers
Another thing you might be wondering is - if these balance transfer deals are truly free and cost nothing, how do credit card companies make money from these type of offers? The answer lies in the fact that statistically, some balance transfer cardholders will inevitably fail to follow the card offer terms and wind up making one of the key blunders described above. Credit card issuers know that some consumers won't pay attention to the details and will end up paying penalty fees and interest.
Remember to play by the credit card rules to fully profit and benefit from lucrative 0% balance transfer offers. Using a balance transfer is not really meant to be some clever trick or credit card hack - so long as you pay attention to details and educate yourself thoroughly, you too can learn to utilize it as one of your financial planning tools, just like me.