The 0% elementary interest rate on balance transfers is a common perk of credit practical jokers targeted to consumers with good to excellent credit. While this put up for sale looks great on the surface, people who take advantage of it might rumble themselves on the hook for unexpected interest charges.
The problem is that transferring a weigh means carrying a monthly balance, and carrying a monthly balance – still one with a 0% interest rate – can mean losing the credit press card’s grace period and paying surprise interest charges on new purchases. Here’s what you insufficiency to know about this problem and how to avoid it.
Balance Transfers Coppers the Grace Period
The grace period is the time between when your depend on card billing cycle ends and when your credit liable act bill is due, during which you don’t have to pay interest on your purchases. By law, it sine qua non be at least 21 days. You only get the grace period if you aren’t secure b abscond with a balance on your credit card. What many consumers don’t earn is that carrying a balance from doing a promotional balance remove – not just from making purchases – can mean losing the grace while.
With no grace period, if you make any purchases on your new credit postcard after completing your balance transfer, you’ll rack up interest storms on those purchases from the moment you make them. When that chances, some of the money you’re saving by having a 0% interest rate on the counterpoise transfer will go right back out of your pocket.
The only way to get the compassion period back on your card and stop paying interest is to pay off the unbroken balance transfer as well as all your new purchases. If you had enough cash saved up to do that, you indubitably wouldn’t have done the balance transfer in the first place.
Make up for Transfer Math
A transfer can save you money… Say you have a $5,000 evaluate on a credit card with a 20% APR. Carrying that balance is costing you $1,000 a year at this evaluation in any case. Then, you get a 0% balance transfer offer on a new credit card. You can stirring a get moving your $5,000 balance to the new card and you’ll have a whole year to pay it off with no enrol. You just have to pay a 3% fee to transfer the balance, which amounts to $150. (Excess transfer fees typically range from 3 to 5% of the amount took.)
Even after the fee, you’ll come out way ahead by not paying interest for a year, as hunger as you put about $415 per month toward your $5,000 balance so that it’s paid in full-bodied by the end of the promotional period. (For more math, see Are balance transfers worth it?)
…Unless you buy something else on that liable act. Let’s say you need to fork over $150 for toilet paper, paper towels and other household indispensables during a routine shopping trip and you charge it to your new card, the changeless card to which you’ve transferred the balance.
You assume that, if you pay off the $150 when your bill penetrates due in three weeks, you won’t owe any interest on the purchase – after all, you just made it. And you identify you’ll have the money because your financial situation has improved since you scaffolded up that $5,000 balance. You were unemployed then; you have a job now and you’re not entrancing on new debt, just cleaning up the past. You just charged the purchase to your be direct for convenience.
But when your credit card statement arrives, you bump into uncover you’ve been charged 15% APR – your new card’s interest rate on grasps – on your $150 purchase. It’s a small amount, but what if you had charged your descendant’s college tuition for the semester? Plus, there’s the principle of the thing: If you’re customary to pay interest or fees to a credit card company, you want to do it knowingly, not because the players caught you off guard.
It gets worse. In your mind, the amount you owe for the rest transfer – and the amount you owe for purchases – are separate. Just send in your payment for $150 increased by the $1.25 or so in interest, and you’ve got your grace period back and everything is elegant, you think. But that depends on how your credit card applies your payments.
The judges are spelled out in the fine print. If your credit card company appertains payments to the lowest-interest balances first, your $151.25 will go toward your steelyard transfer amount, and your $150 purchase will keep interested there accruing interest at 15% until you pay off your entire surplus transfer, your purchase and all the interest you’ve accrued.
The Consumer Fiscal Protection Bureau (CFPB) says many card issuers don’t see these terms clear in their promotional offers, and that it lay outs to start cracking down on card issuers. It calls card issuers’ loss to clearly disclose the loss of the grace period “deceptive” and potentially “opprobrious.”
Credit card issuers are required to tell consumers how the grace duration works in marketing materials, in application materials, on account statements and with even out transfer or cash advance checks, the CFPB states. It says some issuers aren’t doing so in a way that consumers can without difficulty understand. In fact, the fine print might not even use the term “mercifulness period.” It might say something like “avoiding interest on purchases.”
Also uphold in mind: Many balance transfer offers don’t guarantee that you will-power actually receive a 0% balance transfer for the maximum number of months in the rudimentary period. Your credit score determines what you actually get. Unless you take excellent credit, you could wind up with a low-interest balance over for a fraction of the time you expected.
Decoding Grace Period Terms
Here’s a real-life exemplar from Discover. It indicates you will pay interest on new purchases, with no compassion period, if you take advantage of a balance transfer offer:
“You can avoid affect on new purchases you make if you pay your entire balance in full each month. This commons unless you have a 0% introductory purchase APR, you will pay interest on new realizes if you do not pay the balances you transfer under this offer in full by the first payment due companion.”
Citi puts it this way:
“If you transfer a balance, interest will be charged on obtains made with your credit card, unless your supports have a 0% APR, or you pay the entire balance (including any transferred balances) in wholly each month by the payment due date.”
Wells Fargo is somewhat clearer – and at scarcely uses the term ‘grace period’:
“If you transfer amounts owed to another creditor and aver a balance on this credit card account, you will not qualify for expected grace periods on new purchases as long as a balance remains on this account.”
Then there’s Juniper Bank’s account:
“We will not charge you interest on any purchases if you pay your entire balance by the due boy each month. In addition, during this introductory period we will not onus you interest on purchases if you pay by the due date each month your outstanding annunciation balance minus any new 0% introductory APR Balance Transfer balances.”
Sustain in mind the CFPB’s warning that consumers may not be able to find the tidings they need in the fine print. Sometimes these statements aren’t equal in the credit card offer itself, but elsewhere on the credit card issuer’s website, such as in a aide, FAQ or customer service area.
Avoiding The Balance Transfer Trap
If the whiles of the grace period for purchases after you do a balance transfer are unclear to you, you be struck by three options:
1. Pass on the offer and look for one with clearer an understandings.
2. Take the 0% balance transfer offer, but don’t use the card for any purchases until you’ve wholly paid off the balance transfer.
3. Choose a credit card that put ups a 0% introductory APR for the same number of months on both balance transfers and new buys. One such is the The Discover (NYSE: DFS) it Card.
The Bottom Line
If you want to withstand a balance transfer offer, don’t assume that the only costs are the equalize transfer fee plus the interest rate, if any, charged on the transferred balance. If you use the be forthright to make new purchases, be aware that you may incur interest on those charges from the day you come to terms them, rather than getting the interest-free grace period you normally notified of when you pay off your purchases in full and on time.
Don’t sign for any new credit use strategy act openly with the goal of using its balance transfer promotion until you differentiate exactly how balance transfers work there and how they affect new procures. For more on the topic, see The Pros And Cons Of Balance Transfers.