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Balance transfers can leave you scratching your head.
Consolidating all of your debt onto one credit card with a promotional 0% interest rate on balance transfers sure sounds like a good deal. But it’s easy to get tripped up with surprise charges you don’t see coming.
With some balance transfer cards, you lose your promotional interest rate if you miss a payment, you pay less than your minimum payment, your check bounces or you make even a single purchase on the card.
At Credit Karma, we’re here to help you navigate these potential financial stumbling blocks. So let’s take a look at some of the most-common balance transfer risks that could cause you to lose a promotional 0% APR with a balance transfer card, or otherwise cause you to pay interest.
Balance transfer risk No. 1: You pay for something with your card
Some balance transfer cards — like the Citi® Double Cash Card — offer rewards that entice you to spend. But it’s important to remember why you made a balance transfer in the first place: To get out of debt.
It’s best to avoid mixing your debt-reduction plan with more spending.
Besides piling on more debt, spending money on your balance transfer card might also inadvertently void a grace period on purchases — so even if you pay them off by the due date, you’ll still be charged interest on them.
It’s important to read the fine print to find out if that’s the case.
Keep an eye out for language like this buried in terms and conditions:
“If you take advantage of this balance transfer offer, you will be charged interest on purchases,” Discover writes for one of its cards. “To avoid interest on new purchases after you transfer a balance, you must pay all balances on your account, including any balances you transfer under this offer, in full by the first payment due date.”
What does that mean?
Typically, credit cards separate the balance transfer interest rate from the purchase interest rate. Where you might run into problems is when the promotional APR for purchases expires before the promotional APR for balance transfers does.
It’s situations like this where you could be charged interest on purchases you make even if you pay for them in full and on time every month — unless you pay off your entire balance. This includes the balance you transferred plus any other debt you’ve accumulated from the new purchases.
It’s the ultimate balance transfer “gotcha.”
This practice is not uncommon among credit card issuers. We found similar policies at PenFed Credit Union, Citibank and Wells Fargo, to name a few.
For example, during a set promotional period, the PenFed Pathfinder Rewards American Express® Card offers an introductory 0% interest rate for the first 12 months on balance transfers. The card’s terms and conditions outline the rest of the offer, including the 3% balance transfer fee you’ll be charged, and the regular variable APR (12.49% to 17.99%) that you’ll pay after the intro period is up.
But keep reading the conditions: If you use the card for a balance transfer and then swipe it for any new purchases, you’ll immediately start accruing interest on those purchases at a variable APR between 12.49% and 17.99% — there will be no grace period for new purchases.
“If you take advantage of this balance transfer, you will immediately be charged interest on all purchases made with your credit card unless you pay the entire account balance, including balance transfers, in full each month by the payment due date,” according to the PenFed Pathfinder Rewards American Express® Card terms and conditions.
Balance transfer risk No. 2: You forget to make a payment
Some balance transfer credit cards reserve the right to cancel your promotional interest rate if you make a late payment or miss a payment altogether.
Look out for what’s known as a “penalty APR.”
You might be aware of your card’s late fee, but what many don’t realize is that your interest rate could also skyrocket if you miss a payment.
- The PenFed Pathfinder Rewards American Express® Card charges a penalty APR of 17.99% (if your payment is more than 60 days late).
- The Citi® Double Cash Card charges a variable penalty APR of up to 29.99%.
Balance transfer risk No. 3: You pay less than the minimum
It’s a good idea to pay off your new purchases in full every month (and by the due date!).
That said, credit card issuers may give you the option to make a “minimum payment” instead of paying off your entire balance. But if by the due date you’ve paid less than this amount, some issuers treat it like a late payment and activate a penalty APR.What you need to know about a credit card minimum payment
Balance transfer risk No. 4: Your check doesn’t clear
Let’s say you sent your payment in on time.
If your payment is returned for some reason, your credit card issuer could consider it a missed payment and end your promotional interest rate. This could also trigger a penalty APR on your entire balance.
Balance transfer risk No. 5: You don’t qualify for the promotional 0% interest rate
Just because you qualify for a balance transfer credit card, doesn’t mean you’ll get the advertised interest rate. In fact, if your credit needs work, the issuer may charge you a higher interest rate than you’re expecting.
How to avoid these balance transfer risks
Balance transfers can help responsible borrowers pay off debt.
So if you’re serious about transferring a balance, here are a few tips to keep in mind.
- Read the fine print. It’s important to know what you’re getting into.
- Don’t spend more money on your balance transfer card. Best-case scenario? You’ll only pile on more debt. Worst-case scenario? You’ll be walloped with hidden interest charges.
- Think about setting up automatic payments to make sure you don’t miss your due date.
So were we. It took hours for us to comb through the fine print for dozens of balance transfer cards and figure out exactly what they meant.
We certainly don’t want to scare you away from balance transfers, particularly if you’re already struggling with high-interest-rate credit card debt and you need help lowering your monthly payments. Done right, balance transfers can save you thousands of dollars. Keep reading to learn our tips on how to make a balance transfer.
That being said, it’s important to know what you’re getting into when you apply for a balance transfer card. If you come prepared with a plan, you can set yourself up to successfully save money by consolidating your credit card debt at a lower interest rate.