Credit Card Industry Expert Roundup #24 - What do you see as the pros and cons of 0% APR balance transfer offers?
With the holiday season upon us and all of the spending done this past weekend over Thanksgiving, Black Friday, and Cyber Monday, many Americans will be in a situation where they may need to carry a balance on their credit cards longer than they might otherwise need to. Others might elect to open up new accounts and transfer balances online. For these people, Jason Steele asks the experts:
"What do you see as the pros and cons of 0% APR balance transfer offers?"
Bill Hardekopf - CEO of LowCards.com
The obvious benefit of these offers is the opportunity to save money. Transferring your debt from a high interest rate card to one with 0% APR for a period of time can lead to significant savings. But make sure it is worth the trouble. Calculate the amount of interest you will save by making this transfer. Then deduct the balance transfer fee (usually 3% to 5% of the amount your transfer) to see your net savings. Remember, this balance transfer fee is charged when the transfer is made and is added to your debt.
An additional advantage of getting any new credit card is the fact that you will be lowering your debt utilization; your new card will come with a certain credit limit which adds to your available credit and decreases your debt utilization. This will help your credit score.
There are other drawbacks to consider when making a transfer. Sometimes the card offering the balance transfer has a higher APR than your existing card. If you don't pay off the entire amount, you may end up paying more interest in the long run. Don't be late with any payment, especially on a balance transfer; any late payment usually voids your 0% offer. And some cards that offer a 0% balance transfer also offer 0% on purchases during this time period; this can tempt you to make additional purchases and add to your debt. It's important to remember you are likely in this position because of spending too much so don't add to your debt with these additional purchases at the 0% rate.
Michelle Black - Credit expert with nearly 2 decades of experience in the industry. She is the founder of CreditWriter.com and HerCreditMatters.com
When used correctly, a 0% APR balance transfer offer can be a powerful tool to help eliminate credit card debt. Credit card debt is not only one of the most expensive types of debt that the average person will ever carry, but it can also have a negative impact your credit score health as well. Credit scoring models like FICO and VantageScore pay close attention to your revolving utilization ratio (aka the relationship between credit card limits and the balances on those accounts). As those account balances climb, so does your revolving utilization ratio. As a result, outstanding credit card debt might lower your credit scores even if every single payment on the account is made on time.
There are several potential pros to using a 0% ARP balance transfer offer. The most obvious benefit is the fact that a balance transfer offer could save you a great deal of money in interest. Second, if you open a new credit card account with the intent of transferring the outstanding balances from your other cards, the effect will likely be a lower aggregate revolving utilization ratio (assuming that you or the issuer do not close the old account(s) when you transfer those balances over). By lowering your aggregate revolving utilization ratio plus the individual utilization ratios on your newly paid off cards, you might just give your credit scores a boost.
Keep in mind that 0% APR balance transfers are not typically free. Most card issuers will tack on a balance transfer fee (often 3%-5% or higher) for the service. Additionally, it is important that you make a firm commitment to eliminate your credit card debt during the balance transfer offer period and stop overspending. If you transfer your old balances to a new account and turn around and charge those original cards back up again, you could be in store for serious financial and credit issues down the road.
Andy Shuman - Credit expert and an author of the Amazon bestselling Lazy Traveler's Handbook series
The Pros: 0% APR balance transfer offers can be a godsend for folks who need to consolidate their debt at the lowest interest rate possible – and it doesn’t get any lower than 0%.
If you don’t pay your bills in full, but have a good credit score, you can use these offers to get out of credit card debt once and for all. Just transfer all your high-interest credit lines up to the available limit and pay them off in full during the promotional period. If you can’t transfer all your credit lines, start with the highest interest rate card – and not with the one that’s easier to pay off.
Example: Let’s say you have 2 credit cards with outstanding debt. One is $5,000 at 14.9% APR and another one is $1,500 at 10.9% APR. Let’s further presume that the available credit line on your new account is only $3,500.
Tempting as it might be to close out the $1,500 card and transfer the remaining $2,000 from the first, more expensive card to the newest one – this action will lose you money. Instead, you must transfer the $3,500 from the higher APR card. Yes, it will leave you with the same 2 cards as before, but the amount of the more expensive debt will be significantly reduced.
It’s not entirely free. A 0% APR balance transfer is a terrific way to consolidate your debts, but keep in mind that the absolute majority of credit cards charge 2%-5% Balance Transfer fees even for 0% transfer offers. So do the math.
As a rule, you shouldn’t use the new card for new purchases. Check the T&C for your new card. If it doesn’t offer 0% APR on purchases in addition to 0% APR on balance transfer, don’t use it to buy new things! Put it in a sock or a drawer and forget it even exists (but don’t forget to make your payments).
If you are not disciplined and careful, your debt consolidation may not work. Make sure to stick to your payment plan. After the promo period is over, the romance is over as well. The carriage turns back into a pumpkin and your 0% interest becomes a regular APR.
Paid off your credit card debt? Congratulations! Now don’t get caught in the same vicious cycle all over again; pay your new credit card(s) balances in full each and every month.
Beverly Harzog - Credit card expert and consumer finance analyst for U.S. News & World Report.
If you still have excellent credit, using a balance transfer credit card with a zero percent introductory APR could help you save hundreds—and maybe even thousands—of dollars. It gives you a chance to pay off your debt while paying zero interest during the introductory period, which usually ranges from 12 to 21 months.
If you have balances on multiple cards, you can consolidate the debt on your new balance transfer credit card. Making one payment on your debt (instead of three or four separate payments) is less stressful and makes the bill-paying process easier for you. Of course, you’ll need to qualify for a credit limit that’s high enough to accommodate the transferred amount to make this work.
A balance transfer credit card can be a great debt-reduction strategy, but if you make a few missteps, you could end up worse off. One of the biggest mistakes consumers make is to use their balance transfer credit card for new purchases. You have to make a vow that you will not use your new balance transfer credit card. If you do, then you’re just adding to your debt. Another downside is that your credit score could go down because your credit utilization ratio on your balance transfer card will be high. But as you pay down your balance, your score will start moving in a positive direction. Just don’t plan on refinancing your home or applying for any other type of loan before your credit score bounces back. Get out of debt and then you’ll have the financial freedom to make choices again.
Jason Steele - Credit card and travel expert as well as Founder of the credit card media conference CardCon
The clear benefit to 0% APR balance transfer offers is that it can give you the ability, and incentive to pay off your credit card debts very quickly. When you have 0% APR, 100% of your payment goes directly to your principal, without having to pay interest costs. This can be a powerful tool for some to pay off their balance sooner, and save money in the process.
But there are also drawbacks. First, there are balance transfer fees. Most cards have a 3% balance transfer fee, and an increasing number have a whopping 5% fee. If you were going to pay off your balance soon, transferring it and paying the fee could actually be more expensive than the interest you pay for a month or two.
The other drawback is the potential for people to use these offers to postpone paying off their balance, rather than accelerate the process. Some will just imagine that they can utilize these offers over and over again, which isn’t a safe assumption. Use these offers to pay off your debt quickly, and their benefits will outweigh their drawbacks.
Eric Rosenberg - Finance, travel, and technology writer in Ventura, California
For people looking to turn their finances around, a 0% APR introductory period can help them consolidate and pay off their debt for good. That long-term attitude is key to make 0% APR periods work in your favor. For new purchases, 0% APR periods give you some extra wiggle room to pay off a large purchase interest-free for a period of time. But beware, that 0% APR period can be an enticing trap that leads to higher costs in the future.
The biggest downside of a 0% APR period is what happens when people look at their cards as free money and don't pay off the balances before the introductory period ends. When you have to start paying interest, commonly over 20%, those past purchases with "free financing" become very expensive. It is important to know yourself and your personal finance habits before diving into a 0% APR offer. If you can commit to paying it back before the introductory period ends, you'll be in great shape. If you don't pay them off in time, however, you may have been better off without that 0% offer from the start.