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8 Downsides to 0 Percent Balance-Transfer Cards

Gregory Go

Suffering a holiday financial hangover? A balance-transfer credit card that offers a zero percent annual percentage rate, or APR, can help you tackle debt, especially on high-interest store cards that you may have signed up for during a shopping spree. But you've got to understand the fine print to save money with these cards.

Here's how zero percent balance-transfer cards work: You use them to pay off debt on other cards and are charged no interest on those transfers for an introductory period -- usually six to 21 months. After that, the rate rises. Used properly, they can save you a bundle on interest charges.

But before you apply for a zero interest balance-transfer card, be sure to understand these "gotchas" that can trip you up in paying down your debt.

[See: What to Do If You've Fallen (Way) Behind on Your Credit Card Payments.]

1. You'll usually pay a balance-transfer fee. Almost all balance-transfer cards come with a fee for making the transfer, according to data from CreditCards.com. It's typically 3 percent of the amount you transfer, with a minimum of $5 or $10. Do the math to make sure that you'll save money once you pay the fee. If your balance is low enough that you can pay it off within a few months, it may not be worth transferring.

2. Your APR could skyrocket after the promo period. When you apply for the balance-transfer card, you won't know what the post-promo interest rate will be. Ads and applications only give a wide range of what the variable "go-to" rate may be -- for example, 15 percent to 25 percent.

Banks check your creditworthiness to determine the rate you ultimately get, and you won't know it until after you're approved for the card. If it's a high APR and you fail to clear your balance before the promo period ends, you could face huge interest payments. Adding to the risk: The Fed is expected to continue ratcheting up the federal-funds rate in the coming year, which will lift variable credit card APRs.

[See: 12 Simple Ways to Raise Your Credit Score.]

3. New purchases often do not enjoy the promo rate. Many balance-transfer cards do not extend the zero percent offer to new purchases. That means that if you buy things with the new card, you're not only adding to your debt, but you've now got two balances on your card: the transferred balance at zero percent interest and the new purchase balance at a higher rate.

By law, any amount above your minimum payment must be credited to the balance with the highest interest rate. But the bank has the right to credit your minimum payment to whichever balance it chooses. Guess which one that will be? Most will apply your payment to the low-interest balance first, leaving your high-interest purchase balance to accrue more finance charges. The lesson: Don't use your balance-transfer card for new purchases.

4. You may not be able to transfer all of your debt to one card. The issuer decides how much you can transfer, often based on the card's credit limit. You won't know what the transfer limit is until you have been approved for the card. If it's not big enough to cover your high-interest debt, you may want to consider applying for another balance-transfer card.

5. You need good credit to get a balance-transfer card. The old adage holds true here: In order to get a loan, you first have to prove that you don't need it. You may qualify for some balance-transfer cards if you have average to good credit. But for the best deals, you'll need an excellent credit score.

[See: 12 Habits to Help You Take Control of Your Credit.]

6. Timing is important. Most zero percent cards give you 60 or 90 days to make the balance transfer. After that, the deal expires. Make the transfer as soon as you can to get the full benefit of the introductory period. For example, if the promo period is six months and you wait two months to make the transfer, you've only got four months to pay off the balance before the go-to rate applies.

Another point to keep in mind: The balance transfer can take up to two weeks to process, so you'll need to continue making payments on your old card during that time, if any are due.

7. On-time payments are key. Paying on time is always important, but with a balance-transfer card, failing to do so could cost you your zero percent offer and prematurely subject your balance to the go-to APR or an even higher penalty rate that dwarfs what you were paying on your old card. That's on top of any late fees the card charges.

8. You may be tempted to incur even more debt. Keeping your old card open helps your credit score, but if you continue using it to spend beyond your means, you'll find yourself in even more debt. Better to lock that card away in a drawer and only use it for a small purchase every few months to keep the account active.

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