Woman dealing with credit-card debt and in despair

Zero-Interest Balance Transfer Has Its Reward but Riddled with Risks

Paying off credit-card debt is an uphill battle. If the majority of your minimum monthly payment is going toward interest, that makes the climb even more difficult.

Getting out from under double-digit interest rates with a zero-interest balance transfer can make a big difference provided you understand the risks.

Woman dealing with credit-card debt and in despair

 

Dear Mary: May I ask your advice? I have a credit-card balance of $4,500 at 18 percent interest. My FICO score is 700. I’ve been paying just the minimum monthly payment for too many years but I am determined to pay this off in the coming 12 months.

Would it be wise for me to transfer this to a new CHASE Slate credit card that offers zero-percent interest with no fees for 15 months? Or should I keep what I have, bite the bullet and just pay it off over the next year? Mary Beth

Dear Mary Beth: Let’s look at the numbers. If you keep what you have and pay off the $4,500 at 18 percent interest over 12 months, you will make 12 payments of $412.56 each, for a total of about $4,950, of which $450 will be interest.

If you transfer this $4,500 balance to a zero-percent card, a quick calculation shows you will make 12 payments of $375 each, saving you that $450 in interest. That looks like a no brainer. And if that were the only consideration, my advice would be to go with the no interest option and keep $450 in your pocket.

But there are other things to consider.

Risk: Transfer Fees

Most balance transfer offers involve a fee for moving the balance from your old card. A typical fee is 3 percent of the balance—so, for example, you’d be charged $135 on a $4,500 balance. That reduces your potential “savings” and would increase your intended monthly payment to about $388, but you would still come out ahead.

Risk: Slipping Back

You have to think about where this balance came from in the first place. You paid for stuff with credit because you didn’t have enough money. For whatever reason, you saw a revolving balance on a credit card as a viable option. And apparently, things got out of control. You were not determined to make wise decisions and you ended up with a big pile of high-interest credit-card debt.

The biggest risk you face in doing this kind of transfer is that you’ll slip back to your old ways. First, chances are high that you will not get rid of the old account by closing it. You’ll see that account with its new zero-balance as your “rainy day” fallback.

You’ll tell yourself you will NEVER use it, never allow a balance to build-up on it—never, ever again. But you will leave the account open to have just in case of an emergency. I know this because I know myself. Been there, done that.

Statistics tell us that within about two years of paying off a credit-card balance but keeping the account open in case of emergency, a person will run it right back up to the max. Stuff will happen, you’ll have emergencies. That card with its big available credit limit will call your name—in such soft, sweet tones.

Risk: Things Happen

Another risk is that something will happen in the next 12 months that you’ll see as preventing you from making those big payments ($388 or $413, depending on which way you go). Should something go sideways, the new credit-card account with zero-percent interest will be the easiest place to make adjustments. You’ll be constantly aware that you have the option to pay only the small minimum monthly payment rather than keeping to your plan to pay the big payment each month or use it to make a new purchase or more.

Risk: Default Balance

If you go for the balance transfer option, Chase will be delighted for you to do that and even happier if you cannot quite get the total balance paid down to $0 within the 15 months of grace. After all, that is exactly what they are counting on to happen! They’ll be cheering over at Chase Central when they see you default on your intention to get out of there having paid zero interest. After the introductory period, the interest rate bumps back up to a more typical 18% or so.

Risk vs. Reward

All this to say, it is not an easy choice. If you are totally certain you will pay $388 per month come hell or high water, a zero-interest balance transfer is definitely be the way to go.

The initial hit you might get on your credit score for opening the new account and closing the old one would clear itself as you reduced your debt over the year.

I can’t tell you what to do. My job is to hold a light and a mirror to help you see things clearly; to give you the information you need to make the best decision.

Whichever way you choose to go, stick with it. Understand the temptations you’ll face and determine right now that you will not give in, that you absolutely will not add a single purchase to the account and that you will never miss a payment regardless of the sacrifice that may require.

Keep your eye on prize and remember I’m here cheering you on!

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3 replies
  1. PCB_Rob
    PCB_Rob says:

    I stumbled across your Everyday Cheapskate website quite a few years ago and was interested in your Debt-Proof Living strategy. Here is my story:
    I was once in this same position, had a couple of credit cards that were maxed out and could barely keep paying the minimum. My parents decided to sell their home and move in with my sister and her husband, who had an apartment in their basement that was brand new. They wanted to see us enjoy our inheritance. I took my share, paid off my credit cards and bought a house down here in Florida, this was 2009. My parents were thrilled and they came down (from MD) to visit a few times, since I live a half mile from the beach and they loved the beach, the warm waters of the Gulf, the squeaky sand that doesn’t get hot..:) My mom has since passed on but my Dad (92 in May) and my sister are coming down for another visit in May.
    It’s the best thing that happened to me. Since that time, I’ve kept the three credit cards I have at a zero balance most of the time, only using them to pay for medical bills and to make a periodic purchase every now and again to keep them open. I pay that off right away, before the interest hits. Right now, my main card has about $1000 on it from medical bills, and plan to pay that off in a month or two. I have an 832 FICO score and plan on keeping it that way.
    Thank you Mary!

    Reply
  2. Just getting ready
    Just getting ready says:

    I have been debt free all my life (59years). I watched my parents who were “poor” from ‘poor money managers not pennyless”. I do understand the 0 financing programs and they do work if you are diligent. The way you are diligent is consider the 12 month 0% financing to be 11. The 15 month 0% financing to be 14. The 24 month 0%financing to be 23. ETC. By doing this you will divide the amount owed by 1 month LESS than the program is stated. That payment is the one that you make every month (more allowed but NEVER less). I have found that in many (if not all) cases, that last payment is due VERY QUICKLY after the next to last one (sometimes not the full month) and so Boom, they get you with the late payment and you get to pay all of the “interest accrued”. Plan on paying the debt off 1 month prior to the program ending and you will be out of THAT debt.
    2. NEED emergency credit card?????? look for the ones that you “prepay” and dump $500-1000 on it. There is your emergency card….. Blessings, pam

    Reply
  3. Kay Jones
    Kay Jones says:

    I have always paid my credit card balance at the end of the month, but due to emergencies in the past two months I now have a balance. I thought about looking at a new card with a zero interest for balance transfers, but decided against it. I will pay the card off with the interest because of the limit. I have had this card for many years and as a result it has a very high limit. I have since had to retire for medical reasons but have continued to use this card and have an excellent record with them. Any new card will reflect my new reduced income and if there are any other emergencies it will limit my resources. My idea of emergency was medicine not covered by insurance at that time and a vet bill to pay for care for a beloved family pet, so I am confident I will have the resolve to repay quickly. The credit limit may be your deciding factor.

    Reply

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