A few years back, 0% APR on balance transfers was a common noun in the financing industry. While getting it for life was a rare deal even then, today, due to the credit crisis, even the number of institutions offering it for 12 months has come down drastically. This article delves deeper into what the concept means, its uses, and the 'dos and don't' information.
Essentially, 0% APR on balance transfers means an offer, that claims to charge no additional interest on the transfer of balances from one financial instrument to another. For a normal borrower, these are 'charges free' offers, to transfer balances from interest-bearing financial instruments to 0% interest-bearing financial instruments.
In layman's terms, if you have a debt that requires you to pay, say about a 7% interest in it, you can get it transferred to a 0% APR on credit card transfers and save on your future interest payments, that you would have otherwise made on your initial debt. To make this even more attractive, some credit card companies even advertise this concept, mentioning the words 'with no transfer fee' on the offer. In fact, some such credit cards also come with other attractive schemes like cash back offers, rebates, reward points, higher credit limits, etc.
Uses of the Scheme
If you are someone who is overburdened with high interest rate debts, these credit cards offer you the perfect way to save some cash. Let us have a look at some of the uses of this debt reduction facilitating instrument.
- Many high interest bearing credit cards disallow debt consolidation in their terms and conditions. In such a case, you can use this scheme on credit cards to pay off these higher interest debts, and substitute your high interest payments with really low ones.
- For unexpected extra cash needs or to support high expenses, one can use this scheme to get that additional cash infusion. Most of these transfer options make direct money transfers into your bank accounts, and hence, are mostly hassle free.
- You can use the scheme to make high-yield savings. You can borrow money at interest rates as low as 0% APR, and invest them in banks that offer higher interest rates, say about 5%. This way, by taking no high risk positions and just through the transfer of money from one account or instrument to another, you can earn hundreds of dollars.
Contrary to the impression one gets from this scheme of credit card companies, they are not stupid, and this is not a non-profitable offer for them. Those credit cards are just meant to lure borrowers into the debt business. One mistake in payment, and they are saddled with enormously-high interest rates and worse terms and conditions.
So you see, the credit card companies do stand to gain a lot from these credit cards. Yet, if the borrower takes care of a few 'DOs and DON'Ts', he is effectively borrowing money for free, a boon beyond imagination. Here's what a borrower must be careful with, in order to get the better end on the bargain regarding this balance transfer.
- Read all the clauses carefully in the terms and conditions document before signing yourself up under the scheme. In some cases, the scheme is only introductory and only lasts for a few months after enrollment. On expiry of the designated period, the borrower is actually charged an interest rate. Make sure you know the rate, and you know exactly when it will be applicable to you.
- All the transfers schemes do not come with the 'no transfer fees' clause. If your card has transfer fees, find out exactly how much it is, and in which cases it would be applicable (some credit cards even consider convenience checks to be balance transfers).
- Make sure that you always pay your due payments on time. As I mentioned earlier, this scheme is just a lure, and the credit card companies are just waiting for you to delay or default so that they can charge you inflated interest rates from then on. The best way to ensure that you are not saddled with a shocking 20% interest rate as penalty, is to just set up 'automatic payment' from your bank account.
- Keep an eye out for any changes in the credit card company policies. For example, be prepared for early payments if the company suddenly decides to reduce the payment grace periods.
- It is more prudent to not apply for a balance transfer along with the main application. Get approved first, and then, apply for balance transfers later and know your credit limit before you actually do so.
- Look around for all the available options before you to choose your credit cards. Some good options are the Citi Platinum Select Mastercard, the Discover More Card, the Miles Card by Discover, the Chase Slate Card, etc.
While the pros of this concept on credit card transfers are a good many, you might be worse off due to them. If you fall in any of the following categories of borrowers, it is recommended that you do not apply for them, lest you go from crisis to catastrophe overnight.
- If you have poor credit scores or have a credit history of carrying frequent balances, such transfers are not for you. With your immaturity in handling debt, there is a higher probability of you falling into a debt trap and piling on even more debt than before.
- If you require an excellent credit score for something (like a mortgage application or loan) soon, balance transfer credit cards may not be suited for you. The idea will serve you best if you pay off all your balances a few months before you apply for your mortgage loan, so as to give your credit scores time to recover and improve.
- If you frequently forget to pay your bills, you are exactly the kind of customer that credit card companies are hoping to lure with the credit cards.
It would be better not to wait for better deals in the field of 0% APR on credit card money transfer, for you may be waiting forever. With the credit scenario changing almost everyday, what you're getting today may not even be there tomorrow. Make hay while the sun shines.
Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial course of action.