After years of hovering at close to zero, interest rates are on the rise. The Federal Reserve raised rates three times in 2017 and twice more in early 2018, with more increases likely. That’s good news for savers, but bad news for anyone who’s carrying credit card debt. Most credit cards have a variable interest rate, so as the federal fund rate creeps upward, so will the cost of carrying a credit card balance.
However, for some people, there’s a way of getting out of paying these higher rates, at least temporarily. If you’re lucky enough to get an offer for a zero-interest balance transfer, you can move your debt from your current, high-interest card to a new card and pay no interest at all on it for up to a year and a half. That will give you a little breathing room in your budget that so you can pay down the debt faster.
If you’re one of the many Americans who’s fallen into the trap of credit card debt, there’s a certain pleasing irony in this. Sure, credit cards got you into this mess – but the right credit card could help get you out.
How Zero Interest Balance Transfers Work
A balance transfer is just what it sounds like: moving the balance on one credit card to a different one. This can be a brand-new credit card or one you already have, as long as it’s issued by a different bank from the first card. In effect, you’re using the second card to pay off the first one.
Just call up the bank, or log into your account, and tell them you want to transfer a balance. It can take a few weeks for the transfer to go through, so you’ll have to keep paying the first bank until the second one notifies you that the transfer is complete.
You can transfer a balance to nearly any credit card, since banks are always happy to have you paying interest to them instead of their competitors. However, a zero-interest balance transfer is a special deal. In an effort to attract new customers, banks sometimes offer them a temporary interest rate of 0% when they transfer a balance to a new card. You can find examples of credit cards with zero-interest offers offers at NerdWallet and Credit Karma.
How Much You Can Save
Transferring a balance isn’t the same thing as paying it off. You still owe exactly the same amount of money on the second card as you did on the first one. However, you’ll have a break of several months during which you don’t have to pay any interest on that debt, at least during the introductory period. Depending on how big the debt is and how high the interest rate was on the old card, this can add up to big savings.
For instance, say you owe $3,000 on a credit card with an interest rate of 17% APR. Your minimum monthly payment on this debt is now $120. If you pay this amount each month, it will take you 32 months – over two and a half years – to pay off the balance, and you’ll end up paying more than $700 in interest. Even if you double the monthly payment, you’ll take 14 months to pay it off and pay around $325 in interest.
Now suppose you transfer that balance to a card that charges you no interest for 15 months. Even if you can only pay the minimum of $120, you’ll cut your payoff time to 26 months and save close to $600 in interest. If you double this payment to $240 a month, you’ll have the whole balance paid off in just 13 months, before the 0% interest rate has expired, and pay no interest at all.
Things to Watch Out For
Like every great deal, zero-interest balance transfers come with a catch – several, in fact. Before you go rushing off to look for a new card that offers this deal, here are a few things you need to know:
- They’re Not Available to Everyone. According to NerdWallet, most credit cards that offer zero-interest balance transfers require a good credit score of at least 690. If your credit rating is lower than this, you’re probably better off with a personal loan. You can use the money to pay off your credit cards and then pay off the loan in installments.
- They’re Not Free. Balance transfers can save you money in the long run, but they actually cost you money up front. When you transfer a balance to a new bank, it charges you a fee that’s usually around 3% of the total balance. So, if you transfer a balance of $3,000, you owe $90 right off the bat. However, unlike many other bank fees, balance transfer fees aren’t capped, so they can be as high as 5%.
- The Amount Is Limited. If you open a new account because you want to transfer a balance of $10,000, you might be disappointed. The amount you can actually transfer depends on how much credit your new bank is willing to give you – and that’s something you can’t know until after you apply for the account. So, if the bank only gives you a credit line of $7,000, you’ll be stuck leaving $3,000 in your old, high-interest account.
- The Interest Rate Is Temporary. Zero-interest balance transfer offers are only good for a limited time, known as the introductory period. Typically, this is anywhere from nine to 18 months after you open the account. Once that time period is up, the bank starts charging you interest – usually at a high rate – on any balance you have left. For instance, if you only manage to pay off $2,000 of your $3,000 balance during the introductory period, the interest you pay on the $1,000 balance that’s left could be higher than the rate you were paying on your original card.
- Late Payments Can Kill the Deal. Most zero-interest offers include a fine-print warning that if you’re ever late making a payment, your zero-interest period ends immediately. If you miss a payment by just one day, your interest rate could shoot up overnight to a “penalty” rate as high as 30%. This will make whatever balance you have left a lot harder to pay off than it would have been if you’d stuck with your original card.
- New Purchases Are Not Interest-Free. A zero-interest balance transfer offer isn’t the same thing as a zero-interest credit card. You don’t owe any money on the balance you’ve transferred, but if you use your new card to make any new purchases, you will pay interest on those. Some of the best balance-transfer cards offer a 0% APR for new purchases as well, but usually this offer is only good for the first six months. And, of course, any purchases you make with your new card just add to the total amount of debt you have to pay off.
- It Can Affect Your Credit Score. Doing a balance transfer doesn’t hurt your credit score, since the amount you owe stays exactly the same. However, applying for a new credit card to take advantage of a balance transfer offer does ding your credit score. Doing it once isn’t a big deal, but if you try to repeat the trick so you can move your balance again when your introductory rate expires, lenders will start to see you as a bad credit risk. On the other hand, if you take advantage of a zero-interest balance transfer to aggressively pay down your debt, that will improve your credit score.
Ways to Use Zero-Interest Balance Transfers
In the heady days of the early 21st century, when interest rates were still high and credit was free-flowing, some clever finance bloggers figured out how to combine these two facts to make money at the expense of the credit card companies. They used zero-interest balance transfers to borrow money, then deposited the cash in a high-interest savings account, earning 4% to 5%. Then, just before the introductory period ran out, they’d take the cash back out of the bank and pay off the loan, pocketing all the interest it had earned in the meantime.
This cunning practice, called credit card arbitrage, was always tricky, calling for careful attention to detail. Nowadays, it’s more or less impossible. Zero-interest offers are much harder to come by, and bank accounts that pay more than 1% to 2% are virtually unheard of. At those rates, it’s nearly impossible to make enough in interest to meet the cost of the balance transfer fee.
However, it’s still possible to use zero-interest balance transfers to your advantage. Borrowing money at no interest can give you the financial wiggle room you need to pay off other debts. It can also provide you with much-needed emergency cash.
Pay Off Other Debts
The most obvious way to use a zero-interest offer is to transfer a balance from another credit card. Paying off credit card debt is often challenging because of the high interest rates many cards charge. Even if you stop using the card to make new purchases, a large portion of each month’s payment is eaten up by the interest on the balance you’ve already built up. Transferring the balance to a zero-interest card lets you put your whole payment toward your debt, so you can clear it away faster.
However, credit card debt isn’t the only kind you can pay off with a balance transfer. Some banks will also let you transfer debt from student loans, car loans, home equity lines of credit, and other purchases made on credit, such as furniture or appliances.
Often, this process involves using a balance transfer check, also known as an access check. These work just like normal checks, but instead of drawing on your bank account, they draw funds from your new credit card account to pay off your other debt. You then have anywhere from nine to 18 months to pay off the balance, interest-free.
Using balance transfers this way is risky, however. If you don’t manage to pay off the full balance during the card’s zero-interest period, the interest you pay on the remainder will shoot up to a new, higher rate – probably much higher than what you were paying on the loan you started with.
According to Value Penguin, the average interest rate on a five-year car loan is around 4%. The Department of Education says interest rates for student loans range from 3.76% to 8.5%. By contrast, the interest rate on a credit card that’s past its zero-interest period can be as high as 25%. So, if you don’t pay off the balance in time, you could end up paying more interest in total than you would have paid if you’d just stuck with your original loan.
However, if you have a loan that’s close to being paid off already, transferring it to a zero-interest card can be a smart move. Without the added cost of interest, you can throw all your spare cash at the loan balance and erase it completely before the introductory period ends.
Get Cash for Emergencies
Balance transfer checks aren’t just useful for paying down debt. They can also provide much-needed cash in an emergency. You write out a check drawing on your new zero-interest card, deposit it in the bank, and use that cash to pay the bills. Once your emergency is over, you have the rest of the introductory period to pay back the money before you start owing interest on it.
Of course, using a balance transfer check this way isn’t as good as having a real emergency fund in savings. For one thing, you have to pay a balance transfer fee up front, just as you would with any other transfer.
More seriously, you’re paying your bills with borrowed money. If you can’t pay it back within the zero-interest period, you’ll be hit with a high interest rate. So if you’re not sure you’ll be able to pay off the debt that fast, you’re probably better off with a personal loan, which you could pay back over three to five years.
If you have existing debt, you can also use a balance transfer to help you build an emergency fund. Normally, every dollar you put toward savings is a dollar that isn’t going to pay off your debt, so the interest just keeps piling up. In this situation, it’s tempting to throw every dollar you have at the debt and pay it down faster – but that leaves you with nothing for emergencies. If disaster strikes, you end up relying on the card to pay your bills, which just bumps up the balance even more.
A zero-interest balance transfer can take the pressure off. First, you transfer your existing debt to the new zero-interest account. With no interest to pay, your credit card payments will be lower, and you can put the extra money into savings. That way, you can pay down debt and build up savings at the same time.
This is a great plan if you’re able to pay off your debt in full during the introductory period. You’ll come out of it with no debt and a nice little chunk of change set aside for emergency savings. However, if you still have debt left when the zero-interest rate expires, you’ll have to start paying interest on it at a higher rate. Therefore, if you try this strategy, you’ll need to crunch some numbers and figure out how much you can afford to put toward savings each month while still shaving down that loan balance as much as possible.
Use Balance Transfers Responsibly
Make no mistake, credit card issuers don’t offer zero-interest balance transfers out of the goodness of their hearts. They do it because they’re expecting to make a profit. They hope that you’ll either use your new card for purchases, miss a payment, or let your balance sit there until the introductory period expires. If you do any of these things, they can charge you high interest that will more than make up for the zero-interest loan they’ve given you.
To avoid this problem, experts recommend taking some basic precautions:
- Read the Fine Print. Before signing up for a zero-interest balance transfer, make sure you know all the details. This includes the size of the balance transfer fee, the length of the introductory period, the interest rate you’ll pay once that period expires, and whether the new card you’re signing up for has an annual fee. Keep a copy of the paperwork with all these terms on file, so you can refer to it later on.
- Avoid Cash Advances. Make absolutely sure that what you’re signing up for really is a balance transfer, rather than a cash advance. While a balance transfer is sometimes a smart financial move, a cash advance, which comes with extra-high interest and fees, almost never is. However, credit card issuers have been known to send out access checks for both types of transactions – sometimes even side by side in the same envelope. So, if you use an access check to make your balance transfer, look at it very carefully to make sure it’s the right kind.
- Do the Math. A zero-interest balance transfer saves you money during the introductory period. However, it costs you money for the balance transfer fee, as well as interest on any balance you have left when the introductory period ends. To figure out whether the savings outweigh the costs in your case, check out the balance transfer calculator at CreditCards.com. It allows you to input all the details about your transfer, such as the size of your debt, the interest rate you’re paying now, the amount can afford to pay each month, and the fees associated with the transfer. Then it shows you how much you’ll save – or how much extra you’ll pay – by doing the transfer.
- Don’t Ditch the Old Card. When you use a balance transfer to pay off one of your old cards, that doesn’t mean you’re done with that card for good. First of all, you’ll want to check the next statement for the old card and make sure that the balance is paid in full. And second, closing the account could hurt your credit score by reducing your available credit. It makes more sense to keep the old card, charge a small amount on it each month, and then pay the full balance when you get your bill. This will help you improve your credit score while you’re paying down your debt. However, if your old card has an annual fee, go ahead and ditch it. There are other ways to boost your credit score without paying $20 or more every year for the privilege.
- Don’t Use the New Card for Purchases. If you’ve opened a new card to take advantage of a zero-interest balance transfer, don’t use that card to make purchases. Your goal should be to pay down the balance as fast as possible and get it paid off within the introductory period, not run it up by buying more stuff. Also, in most cases, new purchases on the card won’t be included in the zero-interest offer, so you’ll have to pay high interest on them right away. If you must buy on credit, stick to your old cards, which probably have lower interest rates.
- Pay On Time. This is crucial. Missing a payment on a credit card is always a problem, since you get hit with interest as well as late fees. But with a zero-interest card, missing a payment – even by one day – could cut short your zero-interest deal and send your interest rate through the roof. If you’re the kind of person who’s often careless about paying bills on time, a zero-interest balance transfer isn’t worthwhile.
- Stay On Track. Keep a close eye on your new card and make sure you’re on track to pay off the balance before the zero-interest period expires. A few months before the introductory period ends, it’s a good idea to call up the bank and find out the exact date by which you need to have the balance paid off to avoid interest.
Zero-interest balance transfers are a double-edged sword. They can be a great tool to get out of a high-interest debt trap, but if you’re not careful, they can also allow you to dig yourself in deeper. If all you do is move debt from one card to another and then run up your balance once more, you could end up with twice as much debt as you started with.
To avoid this problem, be diligent about paying off your debt once you’ve transferred it. Look at the money you’re saving in interest as extra cash to throw at your debt so you can get it out of your life for good. If you’re smart and careful, you can make sure a zero-interest offer works to your advantage – not the credit card company’s.
To learn about more ways to pay off debt, check out our other articles.
Have you ever used a zero-interest balance transfer? Did you find it helpful or harmful?