When is a 0% Balance Transfer a Good Option?
Credit Cards

When is a 0% Balance Transfer a Good Option?

EPF September 27, 2018

You’ve probably heard a lot of confusing stories about why you should or should not consider a 0% bank transfer on credit cards. This guide will clear the air on the subject and teach you the tricks to making the most out of this opportunity.

Here is what we will cover.

  • What is a 0% balance transfer?
  • The Dos and Don’ts of a 0% balance transfer.
  • When is a 0% balance transfer not good for you?
  • Caveat emptor! The hidden dangers of a balance transfer.
  • How to do a balance transfer in a few simple steps.
  • Final verdict.

What is a 0% balance transfer?

Before we look at 0% balance transfer, we need first to understand what a balance transfer is first.

Simply put, a balance transfer happens when you transfer debt from one credit card to another. The golden question here is why you would want to do that.

Suppose you have two credit cards one  with an APR of 18% and another one with a two year introductory APR of 2%. You can transfer the debt in the high-interest rate card to the zero interest rate card hence save on interest payments.

For the record, an introductory APR is an offer provided by card providers to incentivize people to apply for the card. The promotion period is usually defined, mostly between 12 to 18 months but not below six months. The APR goes up after this period elapses.

A 0% balance transfer happens when you transfer credit card debt to an account with an introductory APR of 0%. For you to qualify for this debt management method, you must have a good to excellent credit score. If your credit score is not at par with the 0% balance transfer requirements, you may qualify for a slightly higher rate, let’s say 2%.

As we will see later in this post, this method of debt management is not always as rosy as it seems.

The Dos and Don’ts of a 0% Balance transfer?

A 0% balance transfer is right for you if you have a concrete payment plan within the set timeline. Otherwise, you would rather stay away from it or end up paying more than if you didn’t take it.

Also, if you go for the 0% balance transfer, avoid making any transactions with high-interest rates, cash advances or purchases with regular APR, until you have paid off the balance transfer. This is because when you hold credit card debts with different APRs, your monthly payments are split between the balances.

Even worse, only the minimum payment is applied on the 0% balance transfer with anything else above that going to the high-interest rate balance.  The problem is that you might not know that your payments are not going to the 0% balance transfer until it is too late.

It is also crucial that you avoid instances where you can lose your 0% balance transfer during the promotional period. These instances include making late payments, having a payment returned, or exceeding your credit limit during the offer period.

When any of these occur, you may be required to pay a higher regular balance transfer rate. Two late payments in a row can further attract a penalty rate which will extend until you make at least six on-time payments in a row. It is therefore essential that you determine the amount required to clear the debt within the promotional period and plan accordingly.

Keep tabs on your payments to ensure that they go to the right account and avoid incidents where you might be forced to take-up debt with different terms. Also, when looking for a 0% balance transfer account, ensure that you compare terms from different issuers.

When is a 0% balance transfer not good for you?

A 0% balance transfer may not be a good option if you are always struggling to make payments on your credit cards.

This form of debt management comes with stringent terms which when violated can lead to aggressive penalties. As a rule of thumb, always ensure that you have a watertight payment plan for all the debt before taking the offer.

It may also not be prudent to take the 0% balance transfer if your debt can be cleared in six months. This is because the balance transfer comes with a fee, mostly 3% of the debt, which can be higher than interest savings especially when running a high balance. However, if you are lucky to get a card that waives the balance transfer fee, grab the opportunity.

The 0% balance transfer may also not be a good option for you if you are not a disciplined spender. When you move debt to the 0% card, you may be tempted to take-up another debt with the first card.

As mentioned earlier, the new high-interest loan takes the priority in monthly payments and may, therefore, prevent you from clearing the 0% loan within the given timeframe.  This will leave you at a worse-off debt position than before.

Again, if your FICO credit score falls below 720, then this form of debt management is out of reach for you. While you can be lucky to find an issuer who accepts a score below this, most won’t accept.

Caveat emptor! Hidden dangers of a balance transfer.

When it comes to balance transfer, it is always prudent to do a thorough evaluation before jumping in. Always remember that the card issuers are for-profit businesses and therefore wouldn’t offer such a deal if there wasn’t something in for them.

Here are some of the hidden dangers you need to watch out for when evaluation 0% balance transfer deals.

  • There may be hidden charges.

Apart from the initial 0% balance transfer fee, there may be other hidden charges. A good example is the annual membership fee charged by some providers.

Ensure that you check the card’s terms and conditions thoroughly and read other consumers’ online reviews.

Remember that it is imprudent to take a 0% balance transfer if the cumulative fees are more than the interest saved. However, there is no need to worry if you do your homework well. There is a high unlikelihood that you will be slapped with an unexpected charge.

  • Rewards can entice you to incur more charges.

Some card issuers provide rewards that can be earned through purchases. If the 0% balance transfer card has such a program, do not fall for the trap.

Most cards that offer introductory balance transfer rates and reward programs do not provide an introductory rate for new purchases. This means that you incur interest charges every time you make a purchase using the card.

The reward program is there to entice you to to make purchases and consequently incurs charges that will offset the interest saved through the 0% balance transfer offer.

  • Balance transfer fees may exceed interest savings.

As previously mentioned, a balance transfer usually comes at a fee ranging from 3% to 5% of the transferred amount. Oftenly, most issuers do not discuss these fees when advertising their offer.

You need to do your research well since these fees can significantly lower the effectiveness of your balance transfer. We recommend that you should around since different providers have different fees and you may be lucky to find a provider with no balance transfer fee.

Does balance transfer affect your credit score?

Another downside of a balance transfer is that it can adversely affect your credit score. Every time you open a new balance transfer account, your credit score is likely to decline slightly.

This is because the age of a credit account is also considered in the calculation of credit rating. However, the drop should not bother you since you’ll recover from it quickly with timely payments.

Your credit score is also likely to suffer if you make an application for a balance transfer and is denied. Likewise, applying for multiple credit cards at the same time or within a short period is likely to have a similar outcome on your credit score.

Closing old accounts immediately after making a balance transfer to a new card can also harm your credit rating. Unless the account has an annual fee, keep it since it is also factored in in the calculation of a credit score.

Failing to make monthly payments on time and to clear the outstanding debt within the promotional period can also have a negative impact on your credit score. Similarly, making multiple debt transfers by moving the debt you have failed to clear to another balance transfer card will have the same effect.

We cannot stress enough on the importance of assessing your ability to make the required payments during the promotional period before you apply for a balance transfer.

In a nutshell, the following steps will help you prevent a balance transfer from impacting your credit score negatively.

  1. Don’t apply too often.
  2. Don’t cancel your old cards if you don’t have to.
  • Review terms and conditions.
  1. Avoid new purchases.
  2. Pay on time.

How to do a balance transfer in a few simple steps.

If this is the first time you are doing a balance transfer, the following steps will guide you through the process.

  1. Check your current balance and interest rate.

Before everything else, it is vital that you determine the amount due and the interest to be paid if you stick to the current plan. Remember that the aim of taking a balance transfer is to clear your debt as soon as possible while saving on interest payments.

  1. Pick a balance transfer card that fits your needs.

Once you have determined the amount due and APR, shop around for a balance transfer card with the lowest APR preferably 0% and fees. Consider yourself lucky if you find a card that waives the balance transfer fees.

  1. Read and understand the terms and conditions.

Ensure that you read the terms and conditions carefully to avoid hidden charges. Compare the charges and interest charged if any with interest saved.

It is also essential that you research further about the card by reading online reviews.

  1. Apply for the card.

Once you have identified the card that meets your needs, you can go ahead and apply for it. Avoid applying for multiple cards at the same time.

  1. Contact the card provider to do the balance transfer.

You can do this online or over the phone. You’ll need to tell the balance transfer card issuer your old card account number and tell them the amount you want to transfer.

Typically, a balance transfer takes between seven and ten days to process. Do not stop making payments on your old card until you receive a confirmation that the transfer has gone through.

  1. Payoff your debt.

Once the transfer is approved, it is time to pay the debt as agreed in the terms. Remember that failure to adhere to promotion terms can result in hefty fines and also affect your credit score negatively.

Final verdict.

While a balance transfer may save you hundreds or even thousands of dollars in interest payments, it may also turn out to be costly when not planned well.

Before you take a balance transfer, always ensure that you read the accompanying terms and assess your ability to adhere to them.

Also, make sure that you have compared the interest to be saved with the fees charged by the issuer for the offer. If the fees exceed the interest savings, then this is not a good deal for you.

It is also prudent that you evaluate different balance transfer issuers before you settle on one. While most charge balance transfer fees, you may be lucky to find one that does not have any charges.

Elite Personal Finance

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