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Eliminate Debt - 0% Balance transfer credit cards sounds awesome?

Updated on June 15, 2011

Everyone has heard of it, but few understand it. 0% balance transfer credit cards are not a secret, yet many people do not know how to utilize them.

Some people believe this is the godsend for short-term borrowing. However, what people don't talk about is how damaging they can be when they are utilized improperly. They are tantamount to high-interest credit card buying.

Transferring your money without interest penalty is a simple process. Many people routinely transfer their balances from one card to another. This is in part because of how easy it is.

The three big disadvantages of transferring high-interest credit card balance to a 0% interest credit card are tremendous financial blunders. This article will focus solely on credit card balance transfer. The other means of using 0% balance transfer credit cards will not discussed.

The three blunders you can fall prey to are FOP. FOP stands for fees, 0% offer length, and purchases.

The first potential blunders centers upon the necessary fees associated with a 0% rate on credit cards for balance transfers. You are required to remit a fee when you transfer outstanding balances from one card to another.

Typically, you're looking at 2-3% of the total balance transferred. This fee is tacked onto the balance total. The fee could be a flat fee, but it's usually a percentage.

People tend to forget to factor in this fee when they are figuring out the balance amount, savings from transferring, and total monthly payment to attain zero balance within the 0% interest period.

The next blunder is the length of time the 0% rate lasts on the new card.

Offers change in a blink of an eye. So you want to triple check the terms and conditions of the new card upon its arrival. You will want to compare the offers you get before you actually commit to a card, but then double check that the rates and terms didn't change in the interim.

Once the period of 0% interest has ended, the interest rate will balloon to roughly 25% APR or so.

To combat the high interest rate payments on your newly transferred balance, you must either transfer the balance again to another card offering the 0% rate. Otherwise, you then pay the higher interest rates. Once you begin paying higher interest rates, you've effectively defeated the entire point of the original balance transfer.

The last potential blunder is using your 0% balance transfer credit card for purchases.

Any purchases made on this card are not subject to the 0% rate. They will be assessed at the higher rate. Further, payments made cannot be applied toward these purchased until the balance transfer has been completely paid off.

This becomes an even bigger challenge when a card you moved balances to also has a 0% purchases rate. You moved the balance to save on the interests costs.

Occasionally, you will encounter a credit card that will address this by having an allocation of payments clause. Companies such as Virgin money credit card will do this every once in a while. If you have a card with a 0% purchases offer, then you can pay off what you bought prior to the end of the balance transfer period. This is somewhat better than the typical zero percent offer you see.

These cards are not the norm. Either way, you need to be sure you carefully read the terms and conditions. Also, avoid using the very credit card you just utilized as a means to clear up your debts on other credit cards as another means to make purchases. That's defeating the whole purpose.

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    • B Stucki profile image

      B Stucki 

      8 years ago

      CC can be tricky! I think it is best to just pay them off every month!

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