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Zero-interest credit card transfers are not cost-free

It seems obvious that if you're paying double-digit interest rates on a card balance that such an offer would save you money. It might, but it might not.

By MSN Smart Spending editor Aug 28, 2013 1:19PM

This post comes from Catey Hill at partner site MarketWatch.


MarketWatch logoZero-interest credit card balance transfers sound like a no-brainer: Transfer debt from the high-interest credit card you’ve been carrying and achieve instant savings and peace of mind. But sometimes zero interest isn't in your best interest.


Woman with credit cards (© Corbis)While the zero-interest balance transfer has been around for decades, experts say these offers are on the rise again -- even for consumers who haven’t been handed such pitches in years. “The offers are aggressive, especially for people with good credit,” says John Ulzheimer, the president of money management site SmartCredit.com.


“It’s not unreasonable to find zero percent on balance transfers and purchases for between six and 18 months,” he says.


Anisha Sekar, a vice president at NerdWallet.com, says that recently “lenders have become less gun shy,” meaning offers are being extended to some with less-than-perfect credit.


Lenders make these offers to attract new consumers, but also to make money. Even if the consumer pays off the balance transfer amount before the promotional period ends, the lender can still make money from things like interchange fees, or payments for the transfer itself.


Consumers can leverage these deals to save money: If you’re paying interest on a balance on one card, and then don’t have to pay it on another card, the math can work in your favor, experts agree.


But just because these offers can be financially savvy for consumers, that doesn’t mean they always are. “A zero percent balance transfer isn’t necessarily zero cost,” says Kathleen Campbell, the president of Campbell Financial Partners in Fort Myers, Fla. Here’s why.


High balance-transfer fees

Balance transfer fees are usually about 3% to 5%, Sekar says. That means that someone transferring a $3,000 balance could expect to pay between about $90 and $150 to the lender. Sometimes the balance transfer fee is a flat percentage with no cap on the amount the consumer will have to pay, Campbell says.


Money-saving tip: To figure out if a zero-interest balance transfer makes financial sense for you, determine whether the interest savings you’ll get from the new card will be higher than the fees you’ll pay to transfer the balance, recommends Bob Morrison, managing principal at Downing Street Wealth Management in Denver.


Short promotional periods

Many card issuers hook you with that alluring 0%. But "it’s zero percent for a certain time, and then the rate substantially increases,” says Campbell -- sometimes to higher than 20%, which can cost hundreds or thousands of dollars.


Money-saving tip: Ulzheimer says that promotional periods tend to range from about six to 15 months. If your offer is for a shorter amount of time, ask yourself if you can really pay the balance off in that time period; if the answer is no, shop around for cards with longer promotional periods.


Strict terms

Just because the offer says that you get the zero-interest balance transfer rate for a certain number of months, doesn’t mean you actually will. Sometimes late payments will void the zero-interest APR, Ulzheimer explains, and then you’ll have to start paying a much higher rate. Even worse: “They may shut down the account, and then you owe the whole balance and can’t even use the card,” he says.


Money-saving tip: Set up automatic reminders so you remember to pay the credit card bill on time each month. 

Lower credit score

Many consumers close their old credit card accounts once they transfer the balance to the new card. But this can lower your credit score, says Sekar, as it reduces the amount of available credit you have.


Money-saving tip: Instead of closing out the account, keep the card but don’t use it, recommends Sekar. However, if the card is charging an annual fee, you may want to consider closing it.


High interest on other purchases

“You may find yourself in an interest-rate trap, even if the balance transfer deal itself looks good,” says Campbell. The reason: Your balance transfer amount gets an interest rate of 0% -- but your other purchases might not. And the interest rates on new purchases can run 20% or more.


Furthermore, “some companies will apply your monthly payments first to the balance transfer money and then to any new purchases, which will likely result in you paying interest on the new purchases, since your payments aren’t paying those down,” Campbell says.


Money-saving tip: Don’t use this card for anything other than transferring your balance, says Morrison. For all other purchases, use cash or if you must, a lower APR card, he says.


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