The Hazards of Using a Zero Percent Balance Transfer With a Credit Card
- Most credit cards charge a fee of three to five percent of the balance for a transfer. In some cases, the amount of the fee will negate any benefit in reduction of interest that you would get from transferring the balance. For example, say you carry a balance of $5,000 on a credit card with an interest rate of 10 percent. If you get an offer for a credit card with zero percent interest for six months, that sounds great because you can save the $250 you would have paid in interest over those six months. However, if the balance transfer charges a fee of five percent of the balance, it will cost you that same $250 just to transfer the balance.
- A credit card charging zero percent interest can quickly change into a credit card that charges you 30 percent interest if you miss a payment. After taking a zero percent balance transfer offer, set up automatic payments to the account so you never miss one of the minimum payments. In addition, be aware of when the zero percent interest rate expires so you can be sure to pay off the balance by that date before the regular interest rate begins.
- Often a card with a zero percent offer for balance transfers does not extend this offer to new purchases as well. Therefore, if you use the credit card to make purchases, these will be charged interest at the card's normal rate. Credit card terms state that the minimum payment always goes toward the balance with the lowest interest rate, so your minimum payment will not pay off the new purchases and they will keep accruing interest. The solution to this is to make a payment above the minimum to cover the full amount of new purchases made on the card to avoid paying interest on them.
- Applying for and opening a new credit card temporarily lowers your credit score for about one year. In addition, if you transfer a large amount to the credit card and use a large percentage of the credit line, this will also damage your credit score. If you open a new zero percent interest credit card when the promotional period is about to end so you can transfer the balance again, this will hurt your score all over again. Therefore, if you are concerned about your credit score because you are planning to apply for new credit in the near future, avoid opening cards to use them for balance transfers.