The Lowdown on Balance Transfers

You may be able to pay off credit card debt faster if you take advantage of no-interest promotions. However, these cards sometimes have a catch.

Elephant balancing on a beach ball

If you’re paying high interest rates on unpaid credit card debt, you might be tempted to transfer your credit card balances to a new card that offers a 0-percent-interest deal. The idea is that eliminating interest charges lowers your ongoing balance, which can help you pay off debt more quickly.

Before you jump on a no-interest card deal, though, it’s smart to understand how they work — and how to avoid possible financial risks.

Interest Charges Complicate Debt Payoff

One of the biggest challenges of paying off credit card debt is dealing with added interest charges. For example, if you owe $1,000 on a card at 27-percent interest, and only make a minimum 4-percent payment every month, it will take you a whopping seven years and eight months to pay off your entire balance.

Adding interest, the total amount you would pay is $1,986 — or an extra $986 in interest. And that assumes you never charge another penny on the card.

High interest rates can make it very tempting to transfer your credit card balance to a new card offering a 0-percent rate. However, here are some things to consider before applying for one of these cards.

Special Rates are Time-Limited

Typically, 0-percent interest rates are promotional, intended to attract new customers like you. This usually means the 0-percent rate only lasts for a short period of time, such as 12 or 18 months. When the promotional period is over, your interest will increase to the company’s regular rate.

When your rate-deal ends, you can call the credit card issuer and ask if they’ll extend the 0-percent rate, but don’t count on it. You also can switch to another credit card with a similar zero-interest promotion. However, constantly opening new credit accounts carries some risk to your credit score.

Watch Out for Credit Checks

When you apply for a new credit card with a promotional interest rate, the company will pull your credit report and credit score. If your credit isn’t good, the company may either reject you or offer you the card without the promotional offer.

Also, when a company checks your credit for a new card, they make what is called a “hard inquiry.” This inquiry can cause your credit score to drop a few points for a short time. If you continue paying your bills on time, your credit will likely inch back upward. However, keep the credit-inquiry effect in mind if you’re looking for a new apartment or applying for a new job. Landlords and employers may check your credit, too, and if you have recently opened new credit accounts, your score could be lower.

Beware of Balance-Transfer Fees

Before you actually move your credit card balance to a 0-percent card, check the new card’s balance-transfer fees. Most cards charge a minimum fee, such as “$20 or 2.99 percent, whichever is higher.” The higher the balance you transfer, the more you’ll pay.

Some cards offer 0-percent introductory balance-transfer fees, in addition to the interest teaser. Like the 0-percent interest rates, however, these deals typically have a set time limit, such as six months to a year.

Read the Fine Print: Different Treatment for New Purchases?

Just because a credit card offers you 0-percent interest on debt you move from another card doesn’t mean they’ll extend that same rate to new purchases. Be sure to read your card agreement.

Some cards will charge you their regular, higher interest rate on any new charges, or on any purchases you make on the card after six months.

Watch for Annual Fees

If you keep the new credit card for more than a year, you may end up paying an annual fee. In many cases, this fee is waived when you first sign up for the credit card. However, you may have to pay it on your one-year anniversary of opening the account.

It’s always worth a quick call to the credit card company to see if they’ll agree waive the annual fee in exchange for keeping your business.

Monitor the Average Age of Your Credit

A major factor in determining your credit score is the average age of all of your credit accounts. If you frequently open new accounts (for instance, a string of new 0-percent credit cards), you’ll lower the average age of your credit accounts. That can lower your credit score over time.

However, if you keep your credit accounts open for a long time (even if you never actually use them), your credit score should go back up.

Always Pay On Time

It’s important to pay all of your debts — including a new 0-percent interest credit card — on time every month. If you don’t, the credit-card company could immediately take away the 0-percent offer and your interest rate could skyrocket.

You may want to use your bank or credit union’s online bill-paying service to set up automatic, monthly payments to your credit card for at least the minimum balance. That way, you’ll never pay late.

If your credit is excellent and you’re careful about paying bills on time, transferring debt to a 0-percent-interest-rate card could be a good move. Just remember, your goal isn’t to keep racking up debt and moving it to new 0-percent cards. Consider paying off your debt as quickly as possible, so you can move on to other, more satisfying financial goals.