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As credit card companies try more and more desperately to lure in new customers, they've begun offering 0% interest rates on balance transfers from other cards. If you're a smart, careful spender, this can be great for you, essentially a free loan and a way to work off your debts without owing hundreds of dollars in interest charges. But these 0% balance transfers have penalties, too, and if you're not careful, you can be stung by them. It's imperative that you pay attention to the fine print, and if you do, you can come out ahead.
You may wonder how the credit card companies can make any money if they're offering 0% interest on balance transfers. And it's true, if none of their customers incurred any penalties or overlooked any fine print, the credit card companies would make nothing on those particular loans. Luckily (for them), lots of people mess up, and those "free" loans turn out to be nothing but.
Here is an example of how 0% interest works. The credit card application usually says that if you transfer a balance over to the new card, you'll pay no interest for a set length of time, usually six months or a year. Let's say 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 card with 0% interest, you'd save that $235.91 and pay just the $5,000 you actually borrowed.
So why doesn't everyone do this? Well, for one thing, not everyone is given the chance. Balance transfer credit card offers are generally only given to people with very good credit reports and good payment history.
If you do get a good credit card offer involving zero percent interest on balance transfers, watch for the things that could get you into trouble and ruin the deal for you.
* Fees. Some of these cards do indeed offer zero interest on balance transfers — but they charge a few for processing the transfer. It's generally a percentage of the amount being transferred.
* Late fees. This is where they'll get you! It's zero percent interest as long as you pay your bill on time every month. If you're late, the zero percent jumps up to 13.9 percent. Then, if you're late again, it goes up to 19.9 percent — and there's no way to get it back down to zero. You have to pay your bill in a timely fashion each and every month, or that zero percent rate is gone forever.
* The introductory period. How long will the zero percent interest last on your new credit card? It's usually six months or a year, though sometimes it lasts forever — i.e., as long as it takes you to pay off the balance. If it's for a set length of time, do some figuring: Will you be able to pay it off within that time? If not, what will the APR be once the honeymoon is over? If it's something unreasonable, you either need to pay off the balance before it kicks in, or select a different credit card application.
* New purchases. That zero percent rate usually only applies to balance transfers. Any new purchases you make with the card will be charged the regular interest rate. That's reasonable, right? But wait: When you make your monthly payments, that money goes toward the lowest-interest-rate balance first. That is, you'll have to pay off the entire amount you transferred over before you even START paying off your new purchases. And those new purchases are racking up interest charges every month in the meantime! Many consumers find it smart to have two credit cards for that reason: one with zero percent on balance transfers, the other for actual month-to-month purchases.
As you can see, the zero percent credit cards can be terrifically useful and can save you money in the long run — but only if you use them wisely and are careful to avoid the pitfalls. Come up with a game plan before you apply online for the credit card, and then stick to it once you're approved. Pay on time every month, look out for fees, and don't make any new purchases on the balance-transfer card.
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