Case Scenario: You have good credit and are being offered a credit card for a balance transfer
that offers 0% APR for 12 months. It's easy to think this is a good deal. However, you need to get your calculations right in order to avoid encountering any difficulties. Here are some ways in which a balance transfer card can give you sleepless nights.
You realise your outstanding balance is way too high
If you have an outstanding balance of $2000, you need to pay off at least $200 every month of that debt, aside from additional expenses charged on the card. It is vital to keep up with the minimum payments. It is so easy to lose focus, feel complacent and state at a bigger payment with time running out. The problem with balance transfer deals is that the introductory periods are teasing and you are always racing against time.
Your balance transfer fee and annual fee eat into your savings
If your outstanding is $2000, with 0% APR, and your older card had an interest rate of 15%, then you are looking at a saving of around $200 - $300. But if your balance transfer fee is high, such as 5 - 6%, and your annual fee is about $50, then you are not really saving much to justify a balance transfer. Unfortunately, many people do not take the time to review these calculations, and end up losing to a bad deal. Therefore it is very important to be careful, because balance transfers
can hurt your credit history and even worse, place you in deeper debt.
The 0% APR is only on balance transfers and not on new purchases
Unless you have a huge outstanding balance and the 0% APR is offered for a long period, it is a good idea to avoid deals where the 0% APR applies only to the balance transfer, but doesn't apply to the purchases. This can create confusing credit card calculations, and allow the credit card issuer to apply tricky strategies onto the credit card customer. It is quite possible that when you pay back some of the debt, it goes towards the balance transfer amount, which does not incur any interest, rather than first paying off the expenses you charged which does incur interest. So in fact, you are never really sure how the credit card company is going to interpret your card payments, unless you completely avoid charging the credit card with any expenses, in which the 0% APR may not be available at all. Final APR is so high it eats into your savings.
You might have saved a few hundred dollars through the balance transfer or even more, but that is not of value if the APR after the promotional period is high and there is still some outstanding balance left on your card. This could happen when credit card companies give you lot of rewards and tempt you to charge to your card even before you have fully paid away your debt.