I’m not a financial guru by any means! I’m 25 and between jobs and I have about $3k of credit card debt from my last jobless period. Right now, since I’m trying to save every penny, I’m paying the minimum balance every month. My APR is 20-something percent and I’m really going nowhere at paying anything off. I hate paying all the interest, I feel like I’m losing a lot of money doing so.
I keep getting offers in the mail for different credit cards, ones that offer a year of 0% APR on balance transfers. Hey, think I, wouldn’t it be a good idea to just transfer my balance over to a new card and avoid paying interest on it for a year (after which I’m sure to have a new, great, high-paying job to swipe it all off the board in one go )?
However, as with all things financial, I’m sure there’s a catch involved. I’ve read the fine print and I can’t see anything wrong with this plan. I don’t charge very much at all, if anything, lately- I’m living on cash so I don’t come out of my unemployment stint in a ridiculous amount of debt. I’m basically only paying for my past purchases on the CC now.
Can the more financially-savvy dopers tell me what the downsides of doing this may be?
Well, for one, if you do a balance transfer, it’ll be much harder to declare bankruptcy on the debt.
There’s a half dozen other reasons, but I don’t have time to list all of 'em…
I have actually done this in order to buy time after some huge, unexpected medical bills. However, keep in mind the following:
You will pay a balance transfer fee which is probably 2 months interest where you have it currently, so you’re really only getting 4 months free,
and
Balance transfers often get charged a higher APR after the introductory rate, so you might end up worse than where you started.
If you’re only paying minimum balances, it’s pretty unlikely you’re going to be able to pay it off soon, so I would pay pretty close attention to the non-introductory APR.
Shuffling debt around tends to be a bad sign financially. If you’re just trying to buy a little time, it’s worth considering. If not, have you considered looking for a loan? My sister took out a loan with her bank to pay off her credit cards (and she’s not a homeowner), so it can be done. But, you should be aggressive with paying off credit card debt first generally, as it’s usually much higher interest than other forms of debt.
For me, I ended up just taking a loan from a family member at the end of the 6 months anyway since I wasn’t any closer to paying it off. This did save me a lot of interest.
Sometimes there’s no reason not to, but you have to be aware of the gotchas:
Balance transfer fees. Some offers have none, some have a fee of a percent or two. Usually the fee is capped so if you transfer large amounts they’re less of an issue.
What happens at the end of the offer. What is the new APR when the balance transfer offer expires after 6 months or a year? Yes, you can transfer to a new card but will you be able to get the same offer then? And card-hopping may be problematic on your credit.
Terms and conditions. Do you have to make purchases to keep the offer intact? Any payments you make will go toward the 0% balance first, so your purchases will rack up interest at the standard rate in the meantime until you pay off the transferred balance. What happens if a payment is delayed and misses the due date? Do you automatically switch to a punitive APR?
If there’s little to no fees involved, and you can pay off the balance by the end of the offer period, go for it. Even if there are catches, you can still make it work, just be diligent.
Also, one last thing to consider - miss a payment, or be late, and your 0% interest can go away in a heartbeat. You need to be extremely careful with credit card debt and shuffling it around isn’t a good long term strategy. People just don’t tend to be able to pay it off.
If you do go through with it (in my opinion) I’d strongly recommend establishing a strategy to pay it off in the 6 months. 3k isn’t insurmountable - you can pay off a lot of debt with freelancing, independent contracting, and so on. Consider a second job, or alternate sources of income, or deep spending decreases. Make a budget.
The catch may be no more than the new company betting on your (presumed) continuing financial irresponsibility. Many people who transfer balance see their payments go down, heave a sigh of relief, and charge up a higher balance.
In addition to transfer fees, monthly fees, minimum use requirements, and other charges, check for retro-active interest and financing fees.
Vendor financing will often have no payments/no interest for one year, BUT if the total amount is NOT paid off in that year, interest from the original date of the loan is charged. I DON’T know if credit card companies can do this.
From what I’ve heard the best bet is to call the CC company, tell them the rate is too high and you’re thinking of transferring the balance to another company with better rates and see if they’ll just lower your rate. Apparently quite often they’ll be willing to settle for getting less interest money off you rather than losing it entirely. That way you don’t have to muck about with the balance transfer fees and potentially higher APRs after the teaser runs out already mentioned and you have a lower overall amount to pay off on an established credit account which is more valuable FICO-wise.
Read the fine print and see what their “default rate” is - probably 26% or more. This is the rate you’ll be socked with if you’re so much as five minutes late with a monthly payment. Also watch out for something sneaky called universal default. If they find out that you were a day late with some other account, even though it’s completely unrelated, they’ll kick you into the default rate.
In addition to what the others have said, being sure that you will have a great new high-paying job in the near future is also something to guard against when looking at your finances. You should definitely be working towards that happening, but there is no guarantee.
And from my experience that nice new better paying job also came with unexpected expenses. I had to relocate, which cost money to move. I had to buy better clothes, as it was a more professional position. I had to spend more on my car because I was driving more and needed new tires and other routine repairs more often, because I could not risk the car breaking down. My social expenses increased as I was wanting to spend time with my new co coworkers who frequented places that were more expensive than I was used to.
In time my salary and expenses matched well, but it took an unexpected additional year for me to get clear of debt. I am glad I didn’t have to deal with a credit card that an APR that went up during that time.
If you switch, and things don’t work out as exactly you planned and thought they would, you could be in much worse shape finacially than you are now.
Of course, you should just get working to pay off the debt as soon as you can, but I have often played my two credit cards against each other by transferring balances between them when they have good offers. Always ask to have the transfer fees waived - they have told me ‘yes’ more than they have said ‘no’-and be prepared to not go through with the transaction if it is not a good enough deal. Just mark it on your calendar and try again in another month or two. Also, pay attention to the interest rate after the special rate expires. I write this on the calendar also.
Oh, forgot to add: If the go-to rate (the APR after the intro rate period is over) isn’t lower than what you have now, forget it.
And if you do transfer, there’s no reason why you can’t call the card company once the go-to rate starts and ask for it to be lowered, too. Anyone can call at anytime and ask for their rate to be lowered. Most people are afraid to!
Thanks for the hints guys! I never thought of calling the CC and asking for a lower rate- I guess I should try this first before I start to screw around with transferring balances.
For sure. Be polite. All you have to tell them is “I have an offer here for blah blah blah. I’m hoping you can meet it or exceed it, because I would rather keep my account with you. What can you do for me?”
I’ve successfully done the zero APR thing for years. The transfer fees have never been that high. Then – and this is the important part – I set up an automatic online transfer from my bank to the credit card that repeats every month until the month before the end of the zero APR rate. At which point I go look for another zero APR offer and transfer to that.
Just three little rules. Watch the transfer fee, be sure you pay the minimum balance or as much more as you can manage, and be sure to keep track of when the 0% rate expires.
I’m with MLS. I keep virtually all of my credit card debt (it’s been as high as $15,000) on numerous 0% cards, shuffling it around to avoid interest and, whenever possible, transfer fees. I’ve been doing this for years with no problems and I have a great credit rating and a FICO that is nearly always around 800, which is very good (max is 850).
But, as others have said, you have to be careful. This game is not for everyone. Do not miss or even be late with any payments, on the card in question, or on any other cards or credit accounts. And you should always pay as much over the minimum as you can manage.
In addition to following this advice, you must not allow yourself to use the new card as an excuse to go further into debt. While you’re unemployed, live as frugally as possible and avoid adding to your debt.
I have a simple spreadsheet set up to track how much I owe on each card, when the rate ends, and how much I have to pay each month to retire the debt by that date. I always pay much more than the minimum, and usually more than the amount needed to clear the debt before the end of the 0% offer.
And whenever one 0% offer ends, there’s always another in the mail.
Right, that and the often nearly hidden fees can make these a bad deal. However, they can also be a good deal if you are careful. Pay the bill as soon as you get it, unless you can pay in person.
And I agree with calling your company and seeing if they want to make an offer. I found the best way is tell them you want to close your account. Last time I wanted to close my account, they offered me 0% for 1 year, then a $50 credit. I still said no.
Well you are, but the interest is there because of the principal. Like glee says, unless you’re making 40% interest on your savings, you’re losing money overall by not paying it off.
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