A familiar adversary for American consumers – credit card debt – is re-emerging as a factor in the U.S. economy and so is one of the most enticing offers that come with it: free balance transfers.
The two were a hot couple in the run-up to the Great Recession when credit card debt topped out at $1.02 trillion in 2008. Free balance transfers threw a lifeline to people having trouble paying off their cards, but it had a short shelf life. The offers vanished when the economy shrunk, credit tightened and consumers cut back dramatically on card use.
Now, however, the economy has recovered well enough to encourage consumers to pay with plastic again. Confidence is building and so is credit card debt. According to the Federal Reserve, revolving debt, which consists mainly of credit cards, reached $887.9 billion at the end of 2014, the highest total in almost five years.
Card companies saw the opportunity to tempt profligate spenders with new offers that are even more attractive this time. Some of the perks include:
- Zero percent APR on balance transfers for up to 18 months
- Zero percent transfer fees for 60 days
- Zero percent APR on purchases for up to 15 months
- No annual fee
- No late fees
Will It Help Pay Off Your Debt?
Those are enticing options for any consumer. One calculator said that if all those conditions were applied to a card owner who owed $10,000 and was paying that national average of 14.9 percent interest, credit card refinancing would save the owner $2.250 over the length of the balance transfer promotion.
Who wouldn’t want that? Maybe you.
“Any strategy related to credit card utilization should include a plan to become debt free, not just transfer the debt from one card to another,” Rick Bugado, Director of Industry Relations for the Association of Independent Consumer Credit Counseling Agencies, said. “Taking such an offer to reduce interest rate is an excellent aid in becoming debt free, but the consumer should continue to make payments higher than the minimum monthly payment and restrict spending until they are out of debt.”
The problem with the new promotions is none of the cards contains all the perks. Visa, American Express, MasterCard and Discovery, the prime players in the industry, have a few elements of those offers in their promotions to help them gain new customers, but none of them offers everything.
Credit Scores A Factor
That is one of several reasons card owners should pause before jumping. The most appealing perks are only for “choice” customers, meaning those with excellent credit scores. If you’re not batting around 700 in the credit score game, you may not be eligible for a “zero-percent transfer” card.
There also is the matter of transfer fees. Only a few cards offer free transfers. Most charge three percent of the balance, meaning a $10,000 transfer, would cost you $300 in fees, right away.
Time limitations are another factor to examine. The offers typically allow 12-to-18 months to pay off the balance you transferred at zero percent. If you don’t pay it off, interest rates between 13 and 25 percent apply, again depending on your credit score.
There also is the matter of purchases made with the new card and the interest rate that will be applied to those purchases. Some cards offer zero percent for between six and 15 months on new purchases, before applying the usual 13-to-25 percent interest rates. Most apply those interest rates immediately.
Consider All Options
Still, there is some merit in switching to a zero-fee balance transfer, especially if you have multiple credit cards. Consolidating credit card debt on one card could simplify things. One card, one payment, one interest rate – with a 12- or 18-month deadline – may force you to focus on the task at hand.
“If the consumer is able to afford the current payments and just looking to reduce the interest burden, they could certainly consider transferring the balance,” Bugado said. “They might also consider finding another source such as a home-equity line of credit. However, they should consider the potential impact to their credit score before opening any new accounts.”
If you’re not in the “excellent” credit card score category, a more workable solution might be debt consolidation, credit counseling or a call to your card provider.
“If the consumer can’t afford the payments, credit counseling or contacting the card issuer is the best way to see if they qualify for some relief before looking into balance transfers,” Bugado said.