If you’ve ever considered moving credit card debt from a high-interest card to a balance transfer credit card that doesn’t charge interest for a year or more, you’re not alone.
Transferring a balance to a credit card that doesn’t charge interest for six to 21 months — with 18 months being the most common timeframe — and you can save hundreds or possibly thousands of dollars in interest charges.
Finding zero-percent balance transfers may be getting more difficult, for a few reasons. And if you do find one, the window to pay it off may shrink.
More people gaming the system
More people are doing balance transfers, but they’re not keeping the cards and using them after paying off the transferred debt. That can make them less profitable for credit card issuers such as Citi, which reported in an earnings call in January that they’re facing “headwinds” from people who use promotional rate balances and don’t carry a balance.
Citibank is one of the nation’s largest credit card issuers. A credit card company’s profit comes when users don’t pay their balance in full each month, or after paying off debt during a promotional window they keep the card and rack up more debt. A transferred balance that isn’t paid off during the promotional window can be set at a much higher interest rate than the card normally charges, and the interest can be retroactive to when it was first acquired.
“The growth in promotional rate balances reflects a strong response to our offers, generating growth in both spending and borrowing activity from new accounts during the promotional period,” said John Gerspach, Citi’s chief financial officer, in the earnings call.
Citi expects promotional rate loans to stabilize and then begin to decline in 2018, Getspach said. It also plans to shorten or eliminate the promotional period on certain offers, he said.
Shorter zero-interest windows would give people less time to pay off the debt they transferred, potentially pushing them away from balance transfer cards. That could lead to another domino falling: fewer reward card bonuses as fewer people charge big purchases on rewards cards for bonus points and then transfer the balance to a card that doesn’t charge them interest for a year or so.
Zero-interest balance transfer credit cards are often only offered to consumers with excellent credit. People with lower credit scores can still get balance transfer cards that save them money, but they’ll likely be charged at least a low interest rate on the transfer amount. Still, if that’s lower than their existing credit card’s interest rate for a year or more, it may be worthwhile.
Balance transfer cards also usually charge a fee of 3-5 percent of the amount being transferred, which can eat into the savings if you pay off the balance during the promotional period. Some don’t have balance transfer fees, so be aware of what the card you’re considering offers before signing up for it.
Another cost to look out for: Annual fees. Not all cards charge one, but an annual fee on a card that you’re hoping to dump in a year is another unwanted cost.
Rising interest rates
Interest rates are always changing, and not always in a good way for consumers.
The Federal Reserve is expected to raise the target federal funds rate in March, which could lead to higher interest rates on credit cards and other financial products. Three rate increases by the Fed are expected in 2018, assuming the economy stays strong, according to Reuters.
The average household with debt has outstanding credit card balances of $16,048. Higher interest rates will make that debt more expensive.
The Fed is expected to raise the target federal funds rate by 0.25 percent. Having $10,000 in credit card debt at 15 percent APR that is being repaid at $200 per month, and then increasing the interest rate to 15.25 percent would add $189 in interest over the lifetime of the debt.
What to do?
If you’re thinking of moving a balance from a high-interest credit card to a zero-interest card with an introductory period, you might want to take advantage of that opportunity sooner rather than later. Such offers may not last for long, either going away completely or shrinking the timeframe to use them without paying interest on the transfer.
Do the math to make sure that any balance transfer fees or annual membership fees don’t negate the savings.
If you do transfer a balance, you should have the goal of paying off the balance completely when the zero-interest period ends. If you don’t, you could be charged interest on the entire amount transferred from the first day of the transfer.
Also, don’t use the credit card for new purchases, either during the introductory period or after it. If your goal is to get rid of debt, then taking on new debt with a new credit card isn’t going to get you there.
If you have a poor or middling credit score, don’t expect zero-balance transfer cards to be offered to you. They’re usually targeted at people with excellent credit, though you may be able to get a transfer card with a lower interest rate than your existing card.
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