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In their relentless pursuit of new customers, credit card companies are offering zero percent interest rates on transferred credit card balances. For the disciplined consumer, this can result in a no-cost loan and a money-saving way to pay off debt. However, zero percent interest rates can also be a costly venture if you stumble into the program's penalties. By being mindful of the rules of the program, a savvy consumer can take advantage of this aggressive marketing tactic.
The zero-percent transfer rate packages being offered by credit card companies are a result of the fierce competition for new customers. Their strategy is volume. Credit card companies are hoping that the money made off people who don't adhere to the built-in stipulations of such programs will outweigh the costs of handling the ones who do. That's why your mailbox is jam-packed with offers. It's a numbers game.
Here's how the zero-percent deal works: Generally, a credit card company offers a credit card that allows you to transfer an entire balance and pay zero percent interest for a fixed period of time. On a regular card, a $5,000 debt paid off over six months at an interest rate of 16 percent will cost $5,235.91. If you used the zero-percent deal, you could save $235.91.
However, these programs aren't offered to everyone. "The zero percent deals are given only to those that qualify based on credit scores, balances, payment history and other criteria," says Tokusan Svenson, an education and counseling professional with American Consumer Credit Counseling. And even if you have good credit, this sweet deal can quickly turn sour if you stumble into the program's penalties. Here are a few issues to look out for:
Fee Charged on Balance Transferred - Look out for cards that charge a fee on transferred balances. They are usually charged as a percentage of the balance, with minimums that can range from $10 to a maximum of $75 and more.
Late Fees - Late fees are particularly nasty on zero-percent transfer deals. With some cards, these work in tiers. One example is a provider who hikes the consumer's interest rate to 13.99 percent after the first late pay incident. A second late pay results in the rate being increased to 19.99 percent. Be careful to pay those bills on time.
Length of Introductory Rate - Those zero-percent interest rates are generally subject to a specified length of time. Some can be as short as six months, while others may stretch to a lifetime - that's the lifetime that the balance exists, or however long it takes for you to pay it off. You should calculate the amount of time you'll need to pay off your transfer in order to avoid the higher rate that kicks in after the introductory rate expires. If you can't pay off the entire balance in time, make sure you pick a card that has a low APR after the teaser expires.
New Purchases - Generally, the zero-percent rate only applies to the transferred balance. Credit cards may charge you their regular APR on any new purchases you make. And here's the kicker - any payments you make to the credit card will first be applied to the principal that has the lowest interest rate. In other words, you have to pay off that entire transferred balance before any new payments can be applied to new charges - charges that are subject to the higher APR. "This is important to bear in mind," Svenson said. "It could mean more finance charges then what a consumer originally expected." Using a different card for new purchases, one with a low APR and no annual fees, might not be a bad idea to avoid this pitfall.
Overall, these zero-percent transfer programs can work for you; the key is to set up a plan before you make a move, and stick to it. Make those monthly payments on time, avoid new purchases on the card and keep your eyes open for hidden fees. Avoid these pitfalls and you could walk away with a zero percent loan.
With the glut of zero-percent deals on the market, why not simply transfer your balance from one card to another? This is a practice called churning, and it has its advantages and disadvantages for consumers.
Churning can negatively impact your credit score. "If too many accounts are opened when there are pre-existing debts, it can hurt a consumer's credit score for seeking new credit," warns Tokusan Svenson of American Consumer Credit Counseling.
Or, it can actually help. "It can change the ratio of how much available credit a consumer has versus the credit currently in use, thereby positively affecting a consumer's score," Svenson notes.
Generally though, the practice is frowned upon by credit card companies, and they may refuse to grant you the card if they see your credit report details an extensive number of balance transfers in the past.