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Zero Percent Balance Transfers May Be Too Good To Be True

Americans are strangled with credit card debt. If you’re the average household, you have a balance of $15,800 at an average APR of 14.89%. That’s $2,352 in interest payments annually. What could you do with that extra money?

There’s a way to avoid paying those interest payments at least for a short period of time now that banks are forgetting about the recent credit crisis and once again deluging our mailboxes with credit card offers with 0% interest on balance transfers [3]. Some of these too good to be true offers give you 6 months or even a year without interest payments. That’s a lot of money that you’re saving that could go towards the payment of that interest.

Not so fast! One of the many statements that we attribute to wise people from generations past is, (say it with me) “if it’s too good to be true, it probably is.” Before you sign up, you better keep reading.

You May Not Get 0%

Have you noticed that on those weight loss commercials they always say “lose UP TO”? The “up to” is in small print while the big number that will make you the size you were in junior high school is big and colorful. Balance transfers are the same way. The best case interest rate is 0% but if you have blemishes on your credit report, don’t expect to get that 0%.

The Transfer isn’t Free

If it’s a bank, they know how to charge you fees and often, there’s a 3%-4% fee for balance transfers. That makes your $15,800 balance transfer $474 less valuable.

New Purchases?

Any new purchase you make probably isn’t going to hold a 0% interest rate for the introductory period. It will build interest at the standard rate that kicks in after the 0% period.

Speaking of the Interest Rate

Before signing up, don’t forget to check the interest rate after the initial 0% period. It may be much higher than what you have now.

Don’t Be Optimistic

Probably the most common form of rationalization related to balance transfers is the, “I’m going to pay the card off before the introductory rate expires” line. Just like many New Year’s resolutions, there’s a better than average chance that you won’t. If it were that easy, you could have paid a lot more before you transferred the card. Don’t make decisions based on this idea.

Close the Old One?

The credit bureaus know the trick. They can spot credit card hoppers a mile away. Understand that cancelling the old card may negatively affect your credit score and trying to transfer your balance from card to card every 6 months comes with possible credit consequences as well.

Is it a Good Idea?

If you were somehow absolutely sure that you could pay the full balance within the 0% period and you were transferring the balance one time, a multi thousand dollar savings is definitely worth it but never transfer to a card that has a higher interest rate than the card you have now.

Remember that trying to beat the banks at their own game will often leave you on the losing end. Focus on spending less and paying down the debt instead of moving it every six months.