0% Balance Transfers Are The Bait, Understand The Trap

I was contacted by Jim at Blueprint for Financial Prosperity. He was wondering if I would be interested in an article that discusses how 0% balance transfers may not always be the best thing to go after. This is the guy that often disputes common personal finance “rules of thumb” with his Devil’s Advocate posts. Knowing that he’s good at presenting a less represented side of the story, I told Jim I’d be very interested. He didn’t disappoint…

0% Balance Transfers Are The Bait, Understand The Trap

Nothing in life is free right? So why are credit card companies so eager to offer a 0% balance transfer to you? What does a mouse see when he sees a cheese laden mousetrap? He sees the cheese. What he doesn’t see it the bone-crushing striker panel that will flip whenever he snatches up the juicy piece of Cheddar he smells. What does someone in debt see when they are offered a wonderful 0% balance transfer? They see 12 months of interest free breathing room, where their payments go towards principal, and a little respite against the daily battle. I’ll help you see the rest of the trap.

Trap #1: Fees
If you aren’t careful, the 0% balance transfer offer may come with a balance transfer fee of 3%, which will cut into how awesome of an offer that is. In fact, while some companies do have caps on the fee, others, such as some Chase cards, don’t have a cap. Read the fine print very very carefully because if you apply for a card with a fee and then don’t use the transfer, you might be tempted to use it anyway because your credit score already took a hit for the new card. Don’t put yourself in that situation!

Trap #2: Interest Rate After Promotion
You probably know your aggregate interest rate this very second… so how does the post-promotional rate of the credit card compare? Does it make sense? If you have a 9.99% interest rate for life on a loan, it may not make sense to get a 0% interest rate for a year and then have it spike up to 19.99% afterwards… especially if you plan on taking more than a year to pay it off. However, if you think the 0% will let you pay down the debt so fast that you can get rid of it within the promotional time period… then it’s definitely a good deal. You need to do the math and figure out if it’s really the right decision for you.

Trap #3: They Trust You To Fail
Let’s be honest… you’re in debt for a reason, you spent more than you earned. While it’s not the worst thing in the world, it’s something the credit cards depend on. They depend on the fact that the probabilities are telling them that offering you a 0% balance transfer is going to earn them way more money than it is going to save you. What you need to do is to make sure, before you take on the offer, that you can change your previous behavior so that you don’t become profitable for the credit cards. They are counting on you to make yourself poorer, that’s the biggest trap of all.

There you have it, the three headed monster that stands behind each and every 0% balance transfer. Now that you are aware of it, it’s up to you to look at each of these offers in a new light and see them as more than free cash.

Note from Tricia: Often, on financial blogs, you will see links for credit card offers. These are usually referral links. The above links will take you to Jim’s sites where he has credit card offers listed. He makes a commission on each sale. As a blogger, I know about this, but I wanted to make sure you were aware. I don’t endorse obtaining new credit, but if you are going to do it anyway, the lists that bloggers like Jim produce can be very helpful in helping you select a card to apply for, since they often list the particular perks of each card and their offers.

Posted by Tricia on August 29, 2007 at 9:17 AM in Credit Cards | 16 Comments »
You can leave a response or trackback from your site.

Newer Posts Older Posts

College Guide responded:
Posted: August 29th, 2007 at 9:22 am
I agree even though I may not call it a trap. It’s the same with planning; if you are not a head of schedule, you are behind of schedule.

There is really no such thing as being on schedule since you can’t predict the future, any small event can change that. Interest is in it’s essence evil, period.
Starving Artist responded:
Posted: August 29th, 2007 at 9:33 am
It’s a very dangerous trap if you aren’t careful! I’ve been using 0% APR to help myself out, but I used one of the credit card brokarage sites to find a 0% transfer rate. Jim is right, watch out for the fine print!
Starving Artist responded:
Posted: August 29th, 2007 at 9:37 am
Oh, and I was a little shocked at how little time Bank of America gave me between the time they sent out the bill, and when the bill was due. They are are trying to trip you up! I blogged about it yesterday.
Jim ~ mydebtblog.com responded:
Posted: August 29th, 2007 at 10:06 am
I think a lot of people get worried about 0% APR cards because there has to be some kind of catch to them. Why would a company loan you money for a year or more and not make any money off the interest? They will either try to hit you with a fee when you transfer the balance, usually 3% sometimes capped at $75, but there are offers out there with no fee balance transfers. If you use the card during the 0% promo period, the regular APR may not be 0% and your payment will only be applied to the lowest APR. So while the transferred balance is paid off while the regular transactions continue to rack up finance charges.

Lately I am seeing a lot of stuff out there on people trying to make money off of their 0% cards by transferring an amount, getting cash back, socking it away in an ING account, and paying it off before the promo is up keeping the earned interest. That is a dangerous game to play about as stable as a house of cards.
» 0% Balance Transfer Bait on War On Credit Cards responded:
Posted: August 29th, 2007 at 12:13 pm
[...] extremely dangerous if used improperly, that’s why a post over at Blogging Away Debt, titled 0% Balance Transfers Are The Bait, Understand The Trap is so valuable. It lists three traps that most people may not be aware of when it comes to 0% [...]
JvW responded:
Posted: August 29th, 2007 at 12:17 pm
Great post. I have fallen into this trap myself and am now wary of all 0% balance transfer offers. Every time I run the numbers, it works out in their favor. Not that this is the case for everybody, but for me, they’re too good to be true.

When I used a 0% transfer, any purchases made on that card were at the regular interest rate. Even now, the balance on that card is charged two rates – the lower balance transfer rate and the regular purchase rate. All of my principal payments go toward the balance transfer, not the purchases so as to accrue the most interest possible.
Around the PF Blogosphere: August 29, 2007 | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing responded:
Posted: August 29th, 2007 at 9:45 pm
[...] Away Debt has a guest post on why 0% balance transfers are baits and lists three traps: 1) Fees: Didn’t they tell me up front how much I would for the [...]
Georgie Smith responded:
Posted: August 30th, 2007 at 1:18 pm
Watch out for Wells Fargo. I moved a debt to their 0% intro rate credit card. Got the first statement and the due date was 1 week away! There was no way to pay online or by phone without getting charged a fee unless using a Wells Fargo bank account. I sent a check by mail paying extra for delivery confirmation which they got 3 days before the due date.

Wells Fargo did not post the payment until a full week after the due date. Then they charged a late fee and a processing fee, and increased the interest rate to the penalty rate of 26%.

I called to let them know I had proof that they got the check in time. It took them 2 months to take off the fees.

It took two months to transfer the debt to another account and in that time, Wells Fargo also took their sweet time posting the second payment. Again, I had sent with delivery confirmation. It was received 12 days before the due date. They charged another late fee and processing fee. Which they refunded 2 months later.

Several months later, they still have not reduced the 26% interest rate even though I’ve sent them written demands and documentation. At least they haven’t sent anything negative to the credit report companies but I’m keeping my eye on that.

What a scam. I’ve also found out that I’m not the only one this has happened to, but apparently I’m the only one who thought to get proof of delivery for the payments.
Shana responded:
Posted: August 30th, 2007 at 9:35 pm
Actually, the statement about Chase not having a cap on the transfer fee is false. The cap is between $50-90, depending on the type of card. This is based on information I’ve seen online, and information I’ve gleaned from talking to them (I have a Chase card).
The Friday Gathering for 8/31/2007 | Gather Little By Little responded:
Posted: August 31st, 2007 at 8:25 am
[...] guest post on Blogging Away Debt tells us how credit card companies bait and trap us with 0% – I always love articles that back up my claim that credit cards are [...]
Kevin responded:
Posted: August 31st, 2007 at 12:04 pm
You are absolutely right. Trap #2 is the honest trap. They’re pretty up front that the 0% only lasts so long. However you really gotta look for the info on the fees, and god help you if you are late on a payment.

However, if carefuly managed, there is money to be made. In the last year, I’ve had 2 cards loan me nearly $50k total at 0%. One waived the fee. The other capped it at $75. That money went into a high interest online savings account. I scrupulously set reminders in my online bill pay system to pay them the minimums every month, with time to spare. I also set reminders to tell me when the 0% interest period was over, which is NOT the same as your due date for that statement. The story ends with me paying off everything, not paying a cent of interest, and making about $2,000 in interest. All that for a $75 fee and maybe 3 hours of work throughout the whole ordeal.
Roundup for week of 26 August 2007: Country roads edition at Mighty Bargain Hunter responded:
Posted: September 2nd, 2007 at 1:37 am
[...] Blogging Away Debt explains the 0% trap. [...]
Roundup for week of 26 August 2007: Country roads edition at Mighty Bargain Hunter responded:
Posted: September 2nd, 2007 at 1:37 am
[...] Blogging Away Debt explains the 0% trap. [...]
Kevin responded:
Posted: September 4th, 2007 at 8:20 pm
Don’t forget that Visa, Mastercard, American Express, and Discover want to get their card in your pocket so that you will use it when you buy things. Not just because they will make interest off of you. You may pay off the balance before the month is over. They make about 2% of everything you buy from merchants.
horrorqueen responded:
Posted: September 10th, 2007 at 11:29 pm
Georgie Smith’s tale is just awful. And it reminds me of something to warn everyone about … just in case you don’t know about it already:

I was making payments in person at the bank (Chase), on the day that the payment was due. I did this for about six months, each time asking the teller anxiously if my payment would be considered on time. Each time I was assured yes, it would be, and was told that my receipt had a date-stamp on it as evidence I’d paid on time.

At some point I got a form letter from Chase telling me that my interest rate was being jacked up because of my history of late payments. WTF?! I called their 800 number in a panic. I had the infamous date-stamped receipts to prove I’d paid on time. I was told that IF YOU PAY IN PERSON AT THE BANK, you must pay several days in advance. Or else it will be considered late.

I was told told ultimately after being told the opposite–what the tellers had told me–by several customer-service people, includng supervisors.

In other words: The right hand didn’t know what the left hand was doing.

I was on the phone at least an hour. I was told I had no recourse to get my credit history fixed other than to write a letter to the bank and request that they change my late-payment status. I was told I could not count on them changing their mind.

I was also told to go to the specific branch where I make my payments and speak to the bank manager there, to make sure what the policy is, as each branch has a different policy regarding how many days in advance to make the payment.

I went to the branch and got a very nice manager; he was shocked himself at the notion that paying in person had to be done days in advance. He said he’d check it out with higher-ups and did so; I was in his office an hour while he tried to ascertain just what exactly the policy is.

These 6 months of lay payments affected all my other cards, and I pay sky-rocketing interests rates.

Yes, I already had outstanding balances that were out of control and already had higher rates than I would have liked.

By the way: There was no indication during these 6 months on my statements that my previous payments had been designated as late.

The manager did advise me that, from the bank’s point of view, a customer has 30 whole days to make their payment, so in theory they just not be trying to make the payment on the day it is due.

Well … I have cash-flow problems because I am a full-time freelancer/consultant … and the companies who pay me pay me erratically. Or are late sometimes. So, I like to pay at the last moment.

Anyway, I hope my horror story helps anyone who might not be aware of this practice.
horrorqueen responded:
Posted: September 10th, 2007 at 11:32 pm
I apologize for all my errors in my previous post. I’m bleary eyed from doing tons of computer work tonight. I can’t see anymore.