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The Benefits & Risks of 0% Balance Transfer Credit Cards - Quicken Loans Zing BlogDavid Bakke is a contributor for Money Crashers Personal Finance, where he shares his tips for money management, frugal living, and improving credit.

Signing up for a 0% balance transfer credit card is an effective way to lower your credit card interest, if gone about in the right fashion. If you’re not organized and responsible, however, these cards can cost you big time in the way of outrageous interest rates after the promotional APR expires. The benefits are usually worth it, but the risks are significant. Primarily, you need to have a clear plan in place for paying off the balance before the 0% APR expires.

How It Works

A balance transfer credit card assumes the balance from one or more of your current credit cards at an interest rate of 0% for a certain period of time. Most come with a fee of 3% of the balance transfer. In the past, you could find many of these cards with no balance transfer fee, but these have basically disappeared.

You don’t pay the fee up front – it is rolled into your new credit card balance. So, the first thing you need to do is calculate whether your savings in interest will offset paying this fee. Some cards will send you the amount in the form of a check, some will issue blank checks for you to fill out, and some will send payments directly to your credit cards. If you receive checks to write against your credit card, you can easily use the money for other things. I used credit card checks a few years back to help with medical bills and baby expenses after my son was born. The card made managing this event much easier.

The Risks

There are several things to look out for after you receive a card with a balance transfer offer.

  1. Apply for the Transfer Quickly. The balance transfer offer will only be good for a limited amount of time. So know which balances you want to transfer before you get the card. Some will give you up to four months, while with others, it’s only 30 days.
  2. Use the Card Only to Hold a Transferred Balance. Although many cards have a 0% introductory rate on purchases as well, it’s a good idea to use the card for the balance transfer only. This will keep things more organized.
  3. Never Miss a Payment. Even if you’re just one day late, a late payment will usually void the 0% APR, and the interest rate could shoot up to as much as 30%.
  4. Don’t Pay Less Than the Minimum. This also voids the terms of the balance transfer.
  5. Don’t Go Over Your Limit. Once again, you’ll lose the 0% APR if you do this.
  6. Don’t Abuse the Privilege. If paying off your balance towards the end of the promotional term looks difficult, your thought may be to simply apply for another card and transfer the balance again. This is like playing musical chairs with your money, where you pay a premium every time you sit down. Avoid it at all costs. Credit card reporting agencies eventually will catch on to this and it can hurt your credit score.

Top Balance Transfer Credit Cards

Below are some of the top balance transfer credit cards, available to new cardmembers. All of the offers have no annual fee. The APR goes to a variable rate based on your credit after the promotional period ends, as high as 30% in some cases if you break any of the cardinal rules mentioned earlier.

Discover More Card

  • 3% balance transfer fee
  • 0% APR for six months on purchases, 18 months on balance transfers
  • 5% cash back on rotating categories throughout the year, such as gas, restaurants, and movies. Everything else receives 1% cash back.

This is one of my favorite cards for balance transfers because of the long 0% promotional period (18 months), and the great cash-back rewards. You can learn more about how it works in this Discover More Credit Card Review.

Capital One Platinum Prestige

  • 3% balance transfer fee
  • 0% APR good through June 2013 on purchases and balance transfers, after that a low variable APR
  • No cash-back perks on purchases
  • Excellent credit needed

Citi Diamond Preferred

  • 3% balance transfer fee
  • 0% APR for 18 months on purchases and transfers
  • No cash-back perks on purchases
  • A variety of travel perks, such as booking assistance with hotels and airfares

Citi Simplicity

  • 3% balance transfer fee
  • 0% APR for 18 months on purchases and balance transfers
  • No cash-back perks for purchases

Citi ThankYou

  • 3% balance transfer fee
  • 0% APR on purchases and balance transfers for 15 months
  • Earn one Thank You point for every dollar you spend

Final Thoughts

Here’s a good strategy to effectively utilize a balance transfer credit card: Let’s say you have $3,000 in credit card debt that you want to pay off. You find a balance transfer card with a 0% APR for 12 months and a 3% fee. This means your total balance will now be $3090. This translates into twelve payments of roughly $260. Therefore, you need to do whatever it takes to send in this $260 each month. You could get a part-time job, switch cell phone plans, drop your home phone, or all of the above. At the end of the year, you’ll have saved lots of money in interest charges by sticking to the game plan.

Have you used a 0% balance transfer credit card to help pay off debt?


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