Responsible use of 0% balance transfer credit cards to improve finances.
There are a number of credit card companies that offer zero percent balance transfer deals. Anyone can apply for them, but they generally are targeted towards borrowers with decent credit scores. Find how to responsibly use a “teaser”, 0% interest rate to pay down debt, save money, and improve finances.
For most households, any balances owed on their credit cards typically carry the highest interest rates among all their debt. This can make it more challenging for them to pay their bills or save money. Car, student and home loans often have far lower interest rates, with some auto loans also offering zero percent interest rates as well. A balance transfer at 0% can help households consolidate their debt to a lower interest rate (zero percent!) and help them pay off their debt in much less time.
How does a zero percent interest rate balance transfer help you?
Surveys indicate that an average household with credit cards carries slightly more than $6,500 in card debt with annual percentage rates (APR) for interest ranging between 14% and 25%. Now compare that to a special, often introductory rate of zero percent on some cards – the potential ability to save money should be obvious.
When you make your monthly payment on the credit card, interest that accrued during the month is paid first and the balance is applied to the underlying principal. For example, if you carry a $2,000 debt on a card with an APR of 24% and pay $75 per month, $40 of that payment goes toward interest, and only $35 is applied to the principal debt. It would take 3 years to pay off the account over time which will include $667 in interest, and that is only if you don't add any new purchases to the card.
Transferring balances from high-interest credit cards to a new card with a 0% APR promotional period (also known as a “grace” period) has many obvious advantages. The main way benefit is that your entire monthly payment goes toward the underlying debt (since the cost of interest is zero), allowing you to pay off the balance more quickly. If you can transfer balances from several accounts onto one 0% card, you get the added convenience of only having to remember to pay one debt rather than juggling multiple obligations.
To get the greatest benefit from the use of a 0% APR card, your priority must be to pay off debt, not to postpone paying or to obtain more credit for a desired purchase. This means you need to manage future spending and poor all of your money into taking advantage of the zero percent balance transfer rate from the lender. If you focus on paying existing debt and reducing your overall indebtedness, your credit score will improve and likely allow you to obtain future credit for major purchases at low-interest rates.
In addition to using a balance transfer to consolidate and pay off your credit card debt(s), the funds can also be used to pay other bills. Such as reduce (or eliminate) the balance due on a personal loan. Or help with auto payments or other bills. The point being any funds you receive from a balance transfer deal may be used in other ways as well.
Steps to take to use zero percent balance transfers effectively
There are plenty of 0% balance transfer cards to consider from all sorts of banks as well as lenders. When making a choice of which card to apply for and use, the important factors to review are the length of the promotional or grace period, annual and balance transfer fees, how quickly balance transfers must be made, rewards and the applicable APR after the promo period ends. Often there is a trade-off between benefits. Some banks also allow the transfer to be done online or over the phone, and some lenders will send you a check in the mail to complete the transaction. Some banks may offer a balance transfer as part of a credit card refinancing program.
Promotional periods. The longer the promotional or grace period, the more time you can use the 0% rate to pay off debt that you will be consolidating. The more money our owe on your credit cards, the more important it is to get the longest promo period possible. Promotions typically range from 12-24 months. The Amex Everyday Credit and Chase Slate cards offer 15-month periods with 0% interest on balance transfers or purchases.
The Citi Simplicity card offers the 0% rate on balance transfers for 21 months and for 12 months on purchases, while the Citi Double Cash card provides 18 months at 0% for balance transfers with cash back rewards for new purchases. None of these cards charge annual fees.
Balance transfer fees. Most credit cards charge balance transfer fees of 3-5% of the transfer amount. This is an upfront cost you will need to pay if you accept a promotional offer. On a transfer of $5,000 you may pay $150-$250. Be sure the transfer fee will be significantly offset by the amount of interest you will avoid paying. Generally, the transfer fee makes more sense if you will require most or all of the promo period to pay the card debt.
The Chase Slate credit card is one of a few with no balance transfer fee. The tradeoff is that the card does not offer any rewards. The Citi Double Cash, Amex EveryDay Credit, Wells Fargo Platinum Visa and U.S. Bank Platinum Visa cards charge 3%, while the Citi Simplicity card charges 5% of the transfer amount.
Balance transfer periods. While the 0% interest rate offered from a bank may run for 15-21 months, the period in which the transfer must be made is usually much shorter. For example, balance transfers must be made within four months of obtaining a Wells Fargo Platinum Visa or Citi Simplicity card. Transfers must be initiated within the first 60 days for U.S Bank Platinum Visa or Amex EveryDay Credit cards. Some cards allow transfers to be requested online, while others require cardholders to make a phone call. This means that you have a limited amount of time to consolidate your bills and debts – do not miss the transfer “window”.
A rewards program is not something you need for a balance transfer deal. The Amex EveryDay and Citi Double Cash cards include a rewards program for new purchases. Most other 0% balance transfer cards do not include rewards programs. Since the objective of obtaining a balance transfer card is to pay off old debt more efficiently rather than to purchase new items, a rewards program should not be a priority when comparing cards.
Compare the long term interest rate offered by the credit card issuer. Review the normal APR that will apply once the promotional period ends and compare the rate with your current cards. Most balance transfer cards have APRs of 14-25% that kick in once the promo period ends. If you plan to have the card paid off by the end of the 0% period, this is not an issue. However, if there is likely to be a balance remaining after the promo period ends, you may begin paying a higher interest rate on that balance than you pay on your current card.
The effect on your credit score from transferring a balance
When you apply for a new credit card, you generally don't know if you will be approved or what spending limit you will be granted. Each bank will have their own internal criteria set. There is a risk your application will be rejected and you will have to apply to a different lender for a transfer deal. These deals tend to be for applicants with middle to high credit scores, and the score needs to often be in the mid 600 range or higher. Multiple applications generally affect credit scores negatively, so be aware of applying to different lenders or banks.
On the flip side, your credit score will likely improve in the long run if you obtain a new line of credit but do not increase your debt. But this is only if you take advantage of the lower APR to improve your finances as well as consolidate debt Lower credit utilization rates generally indicates responsible use of credit and results in higher scores. Credit utilization is the amount of credit in use compared to the amount of credit available.
Obtaining a new credit card will add available credit to your borrowing capacity. Also, if the card from which you transferred a balance does not charge an annual fee, leave that account open. If you do not add any new debt, your percentage of debt to available credit will shrink and your credit score will rise. Find other credit repair tips.
How to apply for a 0% interest credit card
There are different tools to use to search for the best introductory offer. Once you have determined which card is most attractive, the application process is usually quick and simple. It can be completed online. You usually only need to provide basic identification and annual salary information. Some lenders may require a SS number. As noted above, be mindful if they do a credit check as that could negatively impact your credit rating. Depending on the credit card issuer, they may send you a check through the mail, or they will due the balance transfer online or over the telephone.
The issuing bank will review your credit report, and approval or denial of your application may only take a few minutes. You need to have good to excellent credit to be approved for most 0% cards. While terms and conditions vary based on bank, most deals are for people with a credit score of 650 or better.
You typically cannot apply for a 0% balance transfer card from a bank for which you already have a credit card. But that can also vary. As an example of what that means, Wells Fargo generally does not approve applicants for its Platinum Visa card if that person has opened another Wells Fargo Credit card within the preceding 15 months. Bank of America will also have a similar rule in place. Review your credit cards, including those from department stores, to avoid making applications more likely to be rejected.
Use Credit Responsibly
Following a few guidelines listed below will ensure that you get the most out of obtaining a 0% balance transfer card. Make your best effort to pay the balance within the promotional period. Save money, focus on spending on needs and not wants, cut back. To advantage of the deal to pay off (or greatly reduce) your debt.
Do not use the 0% credit card for new purchases. If you must use credit, use the old card from which the balance was transferred, and only use it if you can pay off the balance when the bill comes due. Getting in the habit of paying off credit cards each month will improve your spending habits in the long run.
The credit limit on your new balance transfer card may not cover all the high-interest debt on other cards. Credit limits vary among applicants and are based on a variety of factors including salary and credit history. If the new card will not allow the transfer of all your other credit debt, transfer as much as you can beginning with cards having the highest balances.
Do not be late making payments on your new credit card. Late payment can result in the elimination of the 0% promotional rate, and you will be charged the regular APR on the balance. For example, the 0% APR promo rate will be revoked on the Amex EveryDay Credit card if payment is more than 60 days late.
Balance transfers can take up to a couple of weeks to be completed. Continue to make at least minimum payments your old cards until you receive a statement showing the transfer has occurred.
All options to improve personal finances and to pay off/consolidate debt should always be considered. The responsible use of a 0% APR balance transfer card can go a long way to improve your financial situation. You can knock years off the time needed to repay debts, save hundreds or thousands of dollars in interest payments and improve your credit score over time.