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When No Fee Balance Transfers Are Not the Best Deal |
Have you ever read all of the fine print on a credit card application? Believe me, its not written by Hemmingway. And unfortunately, because of my job, I’ve spent many an hour reading up on hundreds of credit cards. Buried deep in these disclosures is a common credit card trap. Simply stated, any payment you make is automatically applied to the balance on your credit card that has the lowest interest rate. This is where the problems start.
The vast majority of no fee balance transfer credit cards only offer a 0% interest rate on balance transfers. Any purchases you make on your card are charged the standard interest rate. Thus, for example, if you transfer $1000 at a 0% interest rate and spend $1000 at the standard rate (we’ll say 15%), any payment you make will reduce the 0% balance and you will be charged 15% interest on your new purchases. Over the course of a year, you may wind up spending over $150 in interest, when you could have avoided these costs by applying for a credit card that offers a 0% APR on purchases and balance transfers and paying a $30 balance transfer fee.
The same problem arises if you use your old credit card for new purchases after you make your balance transfer. You end up with yet another credit card bill accruing interest.
The right course of action when selecting a balance transfer credit card really depends on the individual. However, if you know you will be using a credit card for new purchases over the course of the following year, I recommend selecting one of following options:
Option 1: Transfer your balance to a no fee, 0% APR card and apply for a second card that offers 0% interest on purchases. Using this option ensures that you will not pay interest for 1 year.
Option 2: Get a credit card that offers 0% interest on purchases and balance transfers for 1 year. Even though you end up paying a balance transfer fee, the money you will save on interest more than offsets this cost.