Ask Stacy: Should I Transfer to a Zero-Interest Credit Card?

Here’s a recent email from a reader who’d like to pay less interest on her credit card balance. In fact, she’d like to pay zero…

Hi Stacy, love the show.

I just saw your article about no-fee credit cards and I was wondering: If I had $10,000 worth of credit, and I wanted to avoid paying any more interest on it, could I use one of these “no-fee” cards and transfer the credit, with the aim to eliminate the $10,000 credit in one year before the “no-fee” period expires? Does that make sense? Is this possible?

Thanks in advance,
Millissa

Glad you love the show, Millissa!

The first thing we need to do is distinguish between credit cards with a zero-percent-interest promotional rate and “no-fee” cards. We’ve written about both lately. Credit card expert Jason Steele wrote Zero-Percent, Fee-Free Credit Card Balance Transfers Are Back and also 5 Great Credit Cards With No Annual Fee. The former is about credit cards that offer a zero-percent interest rate during a promotional period. The latter is simply credit cards that don’t charge an annual fee.

While she didn’t explain it perfectly, I’m sure what Millissa is asking is if it’s possible to transfer a $10,000 balance from an existing card to a new one offering a promotional rate of zero percent for one year.

Moving balances from one card to another is called credit card surfing, and I’ve been doing stories about it for years. It’s definitely possible, and many people do it. In fact, some people even take out zero-percent credit card loans and attempt to earn interest on the money in a high-wire act called credit card arbitrage. But should Millissa go down this road? The answer to that question depends on her personality and position.

Beware transfer traps

It’s obvious that zero percent is better than 15, 18, or whatever percent Millissa is now paying on her $10,000 balance. But transferring to a zero-percent promo rate can be fraught with potential peril. So there are things she needs to be aware of…

1. Are you done yet? Whenever anyone asks me if they should employ some technique to deal with high-interest debt – like taking out a home-equity loan, consolidation loan, or as in Millissa’s case, a zero-percent-interest credit card offer – my first question is, “Why do you owe this money in the first place?”

The response I want is that it came from an unavoidable, isolated incident – like a health or job issue. But if you’re in debt because you’re living beyond your means, fix that problem first. Otherwise, a lower-interest alternative is a band-aid, not a cure.

If you spend more than you make, paying off an existing balance by taking on new credit will only postpone (and make worse) the ultimate day of reckoning. So if you’ve got a spending problem, deal with it. If it’s severe, go to a credit counselor. If it’s manageable, read articles like 5 Steps to Building a Budget That Works.

Your goal should be to destroy debt, not juggle it.

2. How’s your credit? The best deals on rates, terms, and everything else relating to credit cards – including balance transfers – go to those with the best credit. From Jason’s zero-percent post referred to above…

Chase (Slate card) gives the best deal – a 12-month, zero-percent promotional rate for new purchases and balance transfers – to applicants whose credit qualifies them for “Elite” or “Premium” pricing. Those who receive their “Standard” pricing will still have the opportunity to transfer balances with no fee, but they’ll only receive a six-month promotional financing period.

Exact terms will differ with different offers, of course, but the point is that you may not receive the offer you’re counting on if your credit isn’t stellar. Wouldn’t it be a bummer if you only got a few months of zero percent, then the card you transferred to reverted to a rate higher than the one you left?

Step one before you apply for any type of credit is to go to annualcreditreport.com and download a free copy of your credit history. Even better, go to myfico.com and pay $20 for an official copy of your credit score. If your score is over 760, you should be in the sweet spot. But before applying for the zero-percent card, find out the credit score you need to get the best terms, either by reading the fine print or by calling and asking.

Want to improve your credit score? Articles like 3 Tips to Improve Your Credit Score – Fast can help.

3. Are there transfer fees? The point of Jason’s post Zero-Percent, Fee-Free Credit Card Balance Transfers Are Back is that a few issuers are now offering no-fee transfers of credit card balances. Many more will charge you a fee of up to 5 percent when you transfer a balance onto their cards. Some cards also charge fees to transfer your balance out. A 5 percent fee on a $10,000 balance is $500. So before you start any transfer process, make sure the cards you’re transferring both from and to aren’t going to nail you.

4. Will your new charges on the card also get zero percent? Sometimes the balance you transfer to your new card is charged the promised zero percent, but any new unpaid charges are charged the regular interest rate. Read the fine print or ask.

5 Are there any other catches? For example, if you’re one day late on a payment, does your zero-percent interest rate disappear? The only way to find “gotchas” is to look for them in the fine print.

The bottom line

Banks aren’t in business to give people money at zero percent. The reason they make these offers is the same reason casinos offer you free drinks and a $4.99 buffet. They know that a certain percentage of the people capitalizing on their “generosity” will end up capitalized on instead.

So you tell me, Millissa. Are you the type that can take advantage of the house, or will you become a person who’s taken advantage of? If you’ve got your ducks in a row, go for it. Just remember who you’re dealing with, read the fine print, and select the card carefully.

Have you ever transferred a balance? Help Millissa and our other readers by telling us how it went on our Facebook page.

Got more money questions? Browse lots more Ask Stacy answers here.