Should You Use a 0% Balance Transfer Credit Card to Pay Off Credit Card Debt?

If you have a balance on a high-interest credit card, opening a new card that offers a 0% balance transfer MIGHT be a good way to pay off your debt faster. However, for some, this strategy leads to a cycle of more debt, so approach it with caution.

How does a 0% Balance Transfer Work?

You may have received offers from credit card companies, promoting their 0% Balance Transfer cards. Essentially, they are offering to waive the interest rate on their card for a certain period, to encourage you to open a new card with them. Once you open the new card, you transfer your old balance to this new card. You then have a certain number of months that are interest-free.

Normally, when you make a payment on a card with a balance, some of the payment goes toward the principal (paying off the original balance), and some of the payment covers the interest that has accrued that month. On a card with a 0% interest rate, there is no interest accruing, so ALL of your payment goes towards the principal.

Fine Print Details You Don’t Want to Overlook

There is usually a transfer fee (typically around 3%), so your new card balance will be a bit higher from the start. Often the cost of the transfer fee is much lower than the cost of interest that would have accrued on the old card, so this is hardly a deal breaker, but it’s worth noting that this offer isn’t nearly as free as the 0% might lead you to believe.

The interest rates AFTER the 0% period are usually quite high on these types of cards. If you are successfully able to pay off the balance before the 0% period ends, then the APR it reverts to may not matter to you. But if you don’t end up paying off the balance before the end of the 0% period, or you plan to use the new card for new purchases in the future, keep this new APR in mind.

Lastly, some of these cards have a retroactive penalty APR that goes into effect if you don’t pay off the full transfer balance during the initial period. So if you have even just $1 of the original balance left on your card at the end of the promo period, you will get hit with an incredibly high APR, not just on the remaining $1, but on the full initial balance.

When Should You Consider a 0% Balance Transfer?

If you are confident that you can pay the full balance over the 0% period, this could be a good option for you.

Comparison of fees and interest on two hypothetical cards.

Let’s say you currently have a credit card with a $10,000 balance. It has an APR of 16%, and monthly minimum payments of $200. But you have determined that you can consistently pay an extra $400/month (or $600 total).
If you keep paying $600 per month on your existing 16% APR card, it will take you 19 months to pay it off. And you will have paid an extra $1,384 in interest over that time
Instead, if you transferred that $10,000 to a 0% for 18-month Balance Transfer card (with a 3% transfer fee), you’d have it paid off in 18 months. There would be no interest charges, but there would be a $300 transfer fee. So in this scenario, you’d have saved $1,084.

However, if something comes up, and you are no longer able to consistently pay the extra $400 a month as you planned, you will end up with the $300 transfer fee AND the remaining balance at the end of the 18-month period will be at a new APR which may be higher than your original 16% AND you may also be hit with a retroactive APR for the full $10,000. In this scenario, it will have cost you much more than if you’d just stuck with the original card.

While most people intend the pay off the transferred balance in full during the 0% period, often that isn’t how it plays out in reality. We tend to overestimate the progress we can make in the short term, and fail to anticipate unexpected expenses or other setbacks.

Debt Cycle

While utilizing a 0% Balance Transfer may be an effective way to pay down debt faster, in many cases it opens the door to a cycle of debt that can be hard to break. If the reason that you previously accumulated the credit card debt hasn’t been fully addressed (i.e. overspending or a lack of an emergency fund), it’s common for the debt balance to creep back up.

After opening the new 0% APR card, you now have more lines of credit open to you. If some unexpected expenses pop up, and you don’t have a solid emergency fund in place, you may end up needing to put expenses on the old card, the one you just transferred the funds away from. The cycle of aggressively paying down debt, only to have your balance creeping back up months later, much like a yo-yo diet, is really disheartening.

The credit card company is not offering this promotion as a gesture of goodwill. The 0% offer is a teaser rate, meant to lure new, and ideally profitable, customers in. The most lucrative customers for a credit card company are those who carry a balance but only make the minimum monthly payments. If you are successfully able to pay off the balance during the promotional period, Good Job! You played the game well. However, the credit card company knows that many people won’t.

Best practices

If you decide that utilizing a 0% Balance Transfer is the right move for you, here are some tips to ensure you are successful with it.

Plan to pay off your transferred balance one month early. This gives you a little buffer in case you have a month where you can’t make the full payment as planned. If you have a 12-month 0% APR period, plan to pay it off within 11 months.
Schedule automatic payments. Late payments, even by a day, will eliminate your 0% rate. If you aren’t sure you can always make your more aggressive payments, set your auto payments to at least cover the monthly minimum, you can make a second payment on months when you can afford to pay more.
Don’t use the card for new purchases. There is usually a different (higher) rate for new purchases. So don’t add new purchases to this card while you are still tackling the transferred balance.
Don't close the old card. Closing the old card will negatively impact your credit score. Closing it reduces the overall credit available to you. Also, closing it likely reduces your average age of credit.
Don’t run up a new balance on the old card. If you have new expenses on the old card, that you aren’t able to pay off in full, it defeats the purpose of all the progress you are making on the 0% card.
Build an Emergency Fund. It can be tempting to throw every available dollar at the debt you are tackling. But it’s important to have at least some safety net for the unexpected, yet inevitable, expenses.

A 0% Balance Transfer CAN be an effective way to tackle debt faster, but it’s important to understand your cashflow, so you know what you can realistically afford to put towards debt payments. If you need help understanding your cashflow, or want to talk through the pros and potential cons for your specific situation, Schedule a Call today.

Should You Use a 0% Balance Transfer Credit Card to Pay Off Debt?