Information Center – News and Articles about Credit Cards
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Balance Transfers and Credit Card Applications
As credit card lenders try more and more urgently to get new customers, they’ve started offering 0 balance transfer credit cards - cards where no interest in charged on balance transfers.
If you’re a savvy, cautious consumer, this can be great for you, basically a free loan and a way to work off your debts without owing lots of money in interest fees. But these 0% balance transfers have penalties, too, and if you’re not cautious, you can be hit with them. It’s vital that you watch the fine print, and if you do, you can come out on top.
You might wonder how the credit card issuing-banks can make a profit if they’re offering no interest fees on balance transfers. And it’s certainly a fact that if none of their customers suffered any penalties or missed any fine print, the credit card companies would make no money on those specific loans. Luckily (for them), many people make mistakes, and those “free” loans turn out to be far from it.
The following is a hypothetical example of how it works. The credit card application generally states that if you move a balance over to the new card, you’ll pay no interest for a specific length of time, often six months or a year.
So let’s imagine you put $5,000 on such a card, a Visa. With a normal interest rate of 16 percent, you’d pay $235.91 in interest if you paid off the balance over the course of six months. On a Visa credit card with 0% interest, you’d save that $235.91 and pay just the $5,000 you actually borrowed.
If it’s such a great deal, why don’t more people do it? For one thing, not everybody gets the opportunity. You’re only invited to apply for credit cards like this if you have good credit. The lowest interest credit cards are for the best credit reports only.
If you do apply for a credit card that offers no interest on transfers, keep an eye out for the little things that could cause problems for you later.
• Hidden fees. Even the credit cards with no annual fee and no interest on balance transfers sometimes charge a fee for initiating the transfer. Often it’s a simple percentage of the amount you’re transferring.
• Late fees. Pay attention to this! Yes, your fee is zero percent on balance transfers -- but only if you pay on time each and every month. If you’re ever tardy on a payment, the interest rate will jump to 12.9 percent, and if you’re late a second time, it leaps to 19.9 percent. And no matter what you do, it will never come back down again. So you MUST pay your bill on time every month, no matter what!
• The intro period. You get zero percent interest, according to the credit card application, but for how long? The best credit cards will offer it forever -- that is, for as long as it takes you to actually pay off the amount. But in most cases, it’s a specific period of time. Do some calculating beforehand. Can you pay off the debt before the time runs out? If you can’t, what will the new interest rate be once the introductory period is over? Will it even be worth it?
• New purchases. That zero percent rate typically applies just to balance transfers. Anything else you buy with that card will have the regular interest rate applied to it. Fair enough, but hang on:
Your monthly payments will be applied to the balance with the lowest interest rate first. In other words, you won’t even begin paying off your new purchases until after you’ve paid off the zero-percent-interest balance transfer. Meanwhile, you’re accumulating some awful interest charges on the new purchases. Because of this, some people have two credit cards: one to pay off balance transfers at zero percent interest, and another for regular spending.
Obviously, some of these credit card applications are very handy and can really help you save money. But you must use them cautiously and intelligently or the plan will backfire. Generate a workable plan long before you apply for a credit card, and then keep with it once you get the card.
Maybe this thought has occurred to you: If the zero percent will expire after six or 12 months, why not fill out another credit card application before the period ends and transfer the balance again? Nothing, really, except that opening and closing too many accounts can look bad on your credit report. Eventually, creditors might start rejecting your credit card applications if they realize what you’re doing.
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