Although it’s an excellent idea to use a 0% APR balance transfer credit card as a part of your debt repayment strategy, you must definitely pay heed to the fine print of the card before putting pen to paper.
You may often hear people talking about 0% APR cards like some mythical creatures, capable of amazing powers! However, if you look closely you’ll find that these cards are quite like the regular credit cards, having the same rules. To think of them in any other way can be the perfect recipe for ruining your credit score and losing out on the 0% APR offer. Nothing denying that these cards provide you free credit for 12 to 21 months, one bad move and you could be back to square-one, with a hefty APR percentage and no end to your credit woes! Let’s take you through some facts that can help you avoid such a situation:
Fact no. 1 – You may have to cough up a balance transfer fee
Although a good number of balance transfer cards don’t feature any such fee if the transfer is processed within the first 60 days of account opening, the others may come with a 3% to 5% fee on the transferred card balance, as a part of the 0% APR deal. This means that if you transfer a $ 5000 balance to a 0% APR card that has a 3% balance transfer fee, your new outstanding balance would be $ 5150. While it may still be an excellent offer considering your overall interest savings, you must factor in this fee is while working on your long-term debt clearance plan.
Fact no. 2 – Skip a payment and you’re most likely to lose the balance transfer offer, or get forced into paying a hefty penalty APR
While it’s a good strategy to transfer your high interest credit card balance to a 0% APR balance transfer card, save plenty on interest payments, and get rid of your card debt in the quickest manner possible, you must ensure that you never miss any of your monthly payments. The 0% offer can be completely cancelled if you get considerably late in making your monthly payment (by 60 days or more). What’s even worse is that you may get charged a hefty penalty APR on the remaining balance if you’re more than 60 days late (as per Credit Card Act, 2009). This penalty APR can be in the vicinity of 30%, a burden which you can definitely do without!
Fact no. 3 – Majority of these cards apply the 0% APR offer to either balance transfers or purchases
You must carefully understand the workings of the 0% APR offer before getting too excited about a balance transfer card. In majority of cases, such cards offer the 0% APR rate only on the balance transfers and not on purchases. Then you may find other types that extend the 0% APR rate for longer time periods on balance transfers, but limit its applicability on purchases for only around 6 months.
If you’re someone who regularly uses your credit card to buy items of day-to-day needs while you are clearing your credit card debt, you may pile up more and more credit unknowingly.
Fact no. 4 – Buying a balance transfer card for clearing your debt can have a short-term negative impact on your credit score
Although continuing clearing your debt over the long term can boost your credit score overall, several required moves made during the balance transfer process can hurt your credit score in the short-term. As new credit constitutes 10% of your credit (FICO) score, opening a new credit account may lead to a temporary drop in your score by a few points. In addition, just doing a balance transfer won’t make your debt go away. Your credit score will inevitably drop if your credit utilization continues to be high, meaning that you continue piling up credit card debt.
However, it may all work to your advantage if you continue making monthly payments and mend your credit utilization rate. Please keep in mind that credit utilization or the amount you owe constitutes 30% of your credit or FICO score, making it a huge and unavoidable factor.
Fact no. 5 – A balance transfer alone won’t rid you of your card debt woes
A great multitude of people think that they can quick-fix their financial problems by transferring their high-interest card balances. They don’t understand that a balance transfer alone can never rid them of their credit card woes. Although it may save them a lot of money in terms of interest rate in the short-term, they’ll still owe the originally transferred balance to the new card issuer. And the interest component can return with full force once the introductory 0% APR offer gets over. You need to be a really disciplined in your financial habits in order to make the balance transfer work, implying that you need to diligently use the 0% APR offer period to clear away your debts for good.
Fact no. 6 – The regular interest rate becomes automatically applicable post the expiry of the introductory 0% APR offer period
When you get a balance transfer card, you actually engage yourself in a battle of patience and discipline with both the card issuer and yourself! Either you stay disciplined and clear off your entire outstanding balance or have to cough up a hefty interest rate post the expiry of the introductory 0% APR offer period. That’s precisely the reason why card issuers offer the 0% rate for no more than 12 to 21 months! The applicable interest rate post the expiry of introductory period can be anywhere from 5% to 24.9%.
Don’t get taken away by all the fairy tales surrounding the 0% APR balance transfer cards. Rather, equip yourself with facts and figures, and make moves which are in line with your long-term financial plan. A momentary lapse of reason and you may wind up exactly where you started from! So be careful and make the most of balance transfer facility.