Managing credit card debt is easy, right? Find the best 0% APR offer and transfer the balance from your other cards to your no interest account. As long as you make the minimum payments, you’re all good. It seems that way on the surface but the truth is you’re not all good. This is a trap that could lead to some serious credit debt and impact your credit score. Take a closer look at the 0% APR and balance transfer “Deadly Duo” to decide if this combination of debt management is right for you.
Credit cards that offer 0% APR are everywhere. And if your credit score isn’t in the gutter, chances are you will qualify. But before you open the account, read the fine print and pay attention to the expiration date on the 0% interest rate. In just a few months you could be paying the full interest rate on your balance. Those few months of no interest do little to offset the money you’ll pay once your promotional 0% APR offer expires.
In addition to the expiration date of the offer, read the fine print to determine the minimum payment required each month during the 0% APR period. Different credit card providers require different minimum payments. Some may require that you pay 1% of the total balance each month. Others require 2% of the total balance. Be sure you know what you will be required to pay each period before jumping on the offer.
Balance transfers are another potential credit card hazard. If you’ve ever transferred a balance, you’ll know that the transaction isn’t free. There is always a transfer fee involved. These fees vary among card providers and could be 5% or more of the total amount you transfer. Depending on your situation, that could be a significant chunk of change. Also be careful of how the fee is applied. It may be added to your total balance or added to your next month’s minimum payment. If you don’t pay close attention to the terms of the transfer, you could be in for a big surprise.
Balance transfers may be a temporary solution to lower monthly payments but there is a risk. Transferring a balance is not debt repayment. In fact, many people continue to add more debt as they transfer balances. The more debt you have the higher your credit utilization. Credit bureaus take credit utilization into account when determining credit scores. By shifting debt around, you risk impacting your credit score.
So what makes 0% APR and balance transfers the deadly duo? No interest promotions and balance transfers alone pose a risk. When used together to avoid paying off debt, these two credit options can lead to a vicious cycle of opening new accounts and transferring balances rather repayment. This can’t last forever. At some point, the cardholder will run out of cards with promotional interest rates. Credit card companies may stop allowing balance transfers or even cancel the account completely. On top of that, applying for more cards requires hard credit inquiries that will impact the customer’s credit score. Combining these two features could have a lasting impact on your credit health and debt management. Hence the name the “Deadly Duo.”
Handled cautiously, 0% APR and balance transfer offers could be a useful tool to help you pay off your credit card debt. If not, this “Deadly Duo” could turn out to be your worst enemy. Be sure to contact your credit card provider and ask for a detailed explanation of the terms you are agreeing to when you open a 0% APR account or transfer a balance. If you don’t pay attention to the fine print, you could find yourself deep in credit card debt.