You come home from work and walk out to the mailbox to see what the mailman brought you today. You walk back to the house paging through ads, bills, and colorful envelopes offering you credit card rates that sound too good to be true. You might read it and see a promise of financial freedom or you might throw it away without even opening it assuming it’s a scam. Let’s take a look at whether these credit card companies deserve your attention and why they want it so badly.
What do they mean by O%?
If a credit card company is going to offer a 0% rate in any capacity, they’re going to advertise it at you until you get sick of looking at it. What they usually mean when they offer you 0% is no interest for a certain period of time, usually between twelve and eighteen months, on balance transfers. You apply for it like you do with any new credit card and if your credit is good enough, the new credit card company moves you along with the process. You give them the information of the card with the balance you want to transfer and pay a one-time fee to transfer the balance. This fee is usually a percentage, so the higher the balance, the higher the fee. Obviously, the transfer amount needs to be within the credit limit of the new card. The two financial institutions work it out, you have a lower balance or no balance on your old card, and you have a new balance on a shiny new card that you get in the mail.
Credit card companies offer you this excellent sounding deal and make the whole process quite easy because they want their card in your wallet. It’s like any other promotion from any other company that charges a monthly fee. Think about cable and satellite companies that offer irresistible introductory rates. You sign up for a billion HD channels and a dozen DVR’s only to see your bill go way up a year later. The credit card companies draw you in with 0% and then try to entice you into using their card as much as possible through other promotions with different companies that they’re partnered with. You might get discounts at restaurants, gas stations, or online retailers encouraging you to use your new card. Before you know it, the promotional period is up, and you’re stuck with a rate and a balance that’s as high as or higher than the credit card you were trying to get rid of a year earlier.
When is this a good idea?
While these balance transfer offers are ultimately just companies trying to get new customers, sometimes they’re really as good as they sound. With some careful planning, they can be a big help in reducing or even eliminating your credit card debt. If you’re looking to consolidate debt from multiple credit cards, this could be a good way to do it. Personally, I think this is only a good idea if you can completely eliminate the balance you’re transferring during the promotional period of 0% interest. Here are a few simple steps for taking advantage of these promotions:
Step 1: Do the math.
Let’s say you want to transfer a balance to a credit card that offers 0% interest for fifteen months; a fairly common promotion. Take your current credit card payment and multiply it by fifteen. Is it equal to or greater than the balance? If yes, fantastic! Apply for your new card and count down the days to peace of mind. If not, then can you realistically adjust your monthly payment to take care of that balance in fifteen months? Don’t get discouraged if this math doesn’t work out the way you like. Just figure out an amount that you can reasonably afford and consider transferring that amount. Remember to factor in multiple credit card bills if you’re doing a partial transfer.
Step 2: Don’t you dare touch that new card.
If you’ve got your new card and you’ve made it to step two, your new credit card company will gladly remind you of the great deals you can get with your new card. They’ll send you emails and more junk mail encouraging you to swipe that card do get discounts and rewards. Don’t do it. Seriously, don’t fall for it. These are just ads to try to make you spend money where you normally wouldn’t and keep your balance nice and high. Leave your new card in your dresser or something. Bury it in your back yard. Tell your spouse to hide it and not tell you where it is no matter how much you beg. Or, you know, just put it in your wallet and don’t use it. Stumble on this step and you mess up the first step.
Step 3: Stick to the plan.
Now that you have your new card, your new payment schedule, and your new resolve to not use said card, do not be tempted to stray from the plan you’ve made. I’m a big fan of automatic payments. Make them monthly or even weekly and let your new credit card bill take care of itself.
Shop Around for Credit Cards
Credit card companies are constantly competing with each other for your business. If you notice a promotion that you like, there are probably a dozen similar ones for different cards that you can consider. Even if you aren’t looking to wipe out any significant debt, it’s a good idea to shop around once in a while to see if there are any credit cards out there that are better than the card(s) you’re using now. If you’re fortunate enough to already be free of credit card debt, many cards offer you a small percentage of cash back on every single purchase you make. It’s like having a discount card everywhere you go. Your local banks and credit unions might even have some credit cards worth looking at. Your journey can begin right here on WalletPath. Check out our best balance transfer cards to find the best fit for your debt and your lifestyle.