The Ups And Downs Of 0% Balance Transfers

[UPDATE: Some offers mentioned below have expired and/or are no longer available on our site. You can view the current offers from our partners in our credit card marketplace. DISCLOSURE: Cards from our partners are mentioned below.]

To a credit card user in debt, a 0% APR balance transfer can seem like a lifeline. These offers allow new cardholders to pay off their existing credit card balances that are transferred to their new card. But do these ubiquitous offers make sense for most cardholders? Let’s examine the key benefits and drawbacks.

Advantages of Promotional Balance Transfer Offers

The obvious advantage of these offers is that the customer can receive a 0% APR interest rate for as long as 18 months. For instance, if a cardholder owes $5,000 with an interest rate of 15%, then the savings in interest payments over a year and a half would be $1,125. Even with the most common balance transfer fee of 3%, the cardholder would only pay $150 for a net savings of $975.

But the real advantage is gained by cardholders who use these savings to pay down or eliminate their debt. And since most of these promotional financing offers include both new purchases and balance transfers, cardholders get a break from interest on their existing debt as well as new purchases made with their card. This is important as even those who are paying down their balance steadily each month continue to incur interest on new charges from the time of the transaction until a payment is made.

Disadvantages of 0% APR Balance Transfers

As great as these offers are, there are still some serious drawbacks that cardholders should consider. First there is the balance transfer fee. Nearly all credit cards will charge a balance transfer fee equal to 3% of the amount owed. Therefore, cardholders with competitive interest rates who can pay off their debt within a few months may actually be better off without transferring their balance. The exception is the Slate card from Chase which is currently the only product on the market without a balance transfer fee. Keep in mind that even this offer is only valid on balance transfers conducted within the first 60 days of opening an account.

In addition, accepting a promotional financing offer can have a small, but significant effect on your credit score. Cardholders who utilize these offers may continue to carry debt over a longer period of time. This can affect their debt to credit ration which is a minor component of their credit score.

Another factor that few cardholders consider is that balance transfers cannot be conducted within the same institution. Therefore, a customer who owes money on his or her Chase Freedom card cannot receive a Slate card from Chase in order to pay off the balance on the Freedom.

But the most important issue regarding balance transfers is the inherent psychological effects of these promotional financing offers. These cards allow customers to pay a small fee up front with the hopes that they can pay off their balance in the distant future. Yet the mere fact that they have a balance that is not being paid down in the short term is evidence that they may have difficulty doing so in the future. To make matters worse, the accompanying 0% APR financing offers on new purchases reinforce the belief that cardholders can continue to incur debt with impunity. Sadly, credit cards have always had disastrous consequences when used by consumers who are unable to restrain their spending. Offering a reprieve from the responsibility to repay their debts with interest may be akin to telling an alcoholic or a smoker that they can indulge their habit now and worry about the consequences later.

Ultimately, balance transfer offers are only as good as the payment behavior of the cardholders who accept them. By utilizing a 0% APR promotional balance transfer offer as part of a realistic debt reduction plan, responsible cardholders wall start to pay down their debt, not stop.

Image: Visentico / Sento, via Flickr