‘Tis the Season … of very attractive offers from credit cards for cash advances or balance transfers at 0% interest or a very low interest rate (“teaser rates”).  I get them just about every day from credit cards I have and ones I don’t have.  The most aggressive bank sends me about two offers a week, and gives me the option of a 0% rate for about 6 months, or a 1.9% rate for a year.  This sounds like a great deal because these rates are certainly far below the regular interest rates on all my credit cards.  If I have a $10,000 balance on a high interest card and $10,000 in available credit on the card making the offer, it seems like a no-brainer!  They may even raise my limit to give me more room to pay off high balance cards.  How could this not be a great idea?!?!  Well, let’s look at reality.  Let’s start with the basic principle that if lenders and credit card issuers are heavily pushing these offers it is not because of the benefits to you. It is because there is a very good rate of return (i.e. profit) for them.  Breaking it down a little more….

  • The offers almost always come with a flat upfront fee – 4% is the norm, but it can be higher or lower.  This means if you make that $10,000 balance transfer, your card balance will actually be $10,400 and any teaser interest rate or future regular rate will also accrue on the $400.  Let’s say you are paying off another card with a default 30% interest rate, and monthly interest is about $250.  Even with the 4% fee, you still come out far ahead after six months or more of the teaser rate.  Not so fast…
  • Using the same example, lets say you already have a $10,000 balance on the card offering the teaser rate, so after you pay off the other card you have a $20,400 balance on one card ($10,000 balance + $10,400 balance transfer and fee).  That is fine, because that $10,400 just sits there for 6-12 months at 1.9% interest and you’ll worry about it later.  Here is where it gets very tricky.  Your monthly payments will apply to the balance transfer funds first rather than your existing $10,000 balance.  What does this mean? It means that $10,000 is not being paid down for several months and it continues to accrue interest at the regular rate (14-30%), even if you are making large payments to pay off the cash advance during the teaser period.  In six months, your regular balance of $10,000 will be well over $11,000 if you have a relatively high regular interest rate.  If you have an existing balance on your card when you do a transfer, the math (and card terms) are most definitely not in your favor.
  • Even if you start with a zero balance before the advance or transfer, if you cannot pay off the transfer amount in full during the teaser period, you will likely have to start paying off the remainder at a relatively high interest rate.   If you have an existing balance sitting back there accruing interest, it is even worse.  You will likely be in a far worse position in the long term than you would have been by never doing the transfer.
  • Getting away from the hard math, the credit card companies know that these balance transfers are rarely used by people following good financial planning.  Instead, they are used by people who are likely not in great financial health and are “robbing Peter to pay Paul.”  They will not pay off the balance transfer before the teaser rate expires, and they will then be a long-term source of income for the bank by being caught in the high interest credit card spiral.  A cardholder who carries high balances at high interest rates but makes regular monthly payments is a gold mine for a credit card – like a high roller at a casino.
  • Lets be real – many people will then run up charges on the card they paid off, and look for teaser rates on other cards to pay it off again.  This is especially true around Christmas.
  • Finally, if someone is in financial trouble and shifting credit card balances from one to the other, and they eventually have to file for Bankruptcy, they may find that the balance transfer (plus fees and interest) are non-dischargeable in the Bankruptcy.  If you get an advance or transfer within 70 days before you file for Bankruptcy, it is presumed to be non-dischargeable.  Even if it is older the card issuer can still try to show the transfers were made with an intent to file for Bankruptcy later.

The bottom line is that if you are considering a balance transfer, start by reading the fine print of all offers, including the length of the teaser period, the interest rate after the teaser period, what happens if you are late on a payment, how payments are allocated during the teaser period and so on.  Often, the teaser rate is the least important factor.  Keep in mind that issuers always give themselves an “out” to change the terms and raise rates.  If you are a person who carries balances on several cards, pays close to the minimum every month and has higher than normal rates (14% or higher), the reality is that a balance transfer might get you in worse trouble a few months later.  Don’t get deeper in debt because of an attractive sales pitch and “0% Interest” in bright red colors.