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Why 0% Balance Transfers Aren’t Always a Bargain

Aug. 13, 2013
Credit Cards
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By Lisa Hay

Learn more about Lisa on NerdWallet’s Ask an Advisor

Laurie has a lot of credit card debt. A credit card offer recently caught her attention since it offered 0% interest for 24 months.

Laurie transferred her $25,000 in debt to the new credit card company. Two years later, Laurie still had $15,000 of the balance remaining. Adding insult to injury, Laurie was slapped with a 25% annual percentage rate at the end of the 0% offer.

It took Laurie five additional years to pay off the remaining credit card balance, which means that she paid $11,400 in interest.

If she had kept her credit card balance with her old credit card (which had a 9.99% APR), Laurie would have been able to pay off her debt sooner with $9,850 in interest to the credit card company.

The moral of the story: balance transfer deals aren’t always as good as they seem.

A lot of people find themselves in situations similar to Laurie. Let’s take a closer look at the elements of a credit card offer, specifically when it comes to balance transfer deals.

What is APR?

APR stands for Annual Percentage Rate. It is the interest rate you pay for borrowing money from the credit card company.  You may have different APRs for purchases, cash advances and balance transfer promotions.  The APRs will be determined by the cardholder’s credit rating, and yours can be found on your monthly credit card statement.  If you have a promotional balance transfer rate and it expires, your remaining balance will often return to the cash advance rate. Check with your credit card company to confirm your rate on your balance at expiration of the promotion.

What is a standard default rate?

Most cards offer 12/18/24 months at 0%. This means that for your agreed timeframe you will NOT be charged interest for the balance transfer portion of your credit card balance.  This entices people to enroll. You may pay interest for other purchases made on your credit card during this time unless your promotional offer states otherwise. When the promotional time period has passed, 18-25% APR is usually applied to the remaining balance.

So I shouldn’t use a balance transfer offer?

I’m not suggesting that you shouldn’t ever take advantage of a balance transfer offer. If you have done the research, read the fine print, asked the right questions, and feel confident that you can pay it off in the allotted time or you are fine with the arrangement if you don’t pay it off in the zero percent timeframe, then – by all means – feel free to enroll. Just be aware that 0% for an extended period of time is not always the best answer, especially for a sizable balance.

Struggling with your cash flow? Need some help organizing your financial life or just a second opinion? Contact Ascend Financial today!