Here is an interesting tidbit on how consumers use those teaser balance transfer rates offered by credit card companies. As cited in a study from this Marketwatch article, those who take advantage of these balance transfer rates fall into three nearly equal groups:
- About one-third transfered balances to the new card and paid the balance off during the promotional period without charging any other purchases to the card. As purchases are normally charged a much higher interest rate, charging anything to the card is usually a bad deal.
- About one-third continued to make new purchases on the card each month at the much higher interest rate.
- About one-third had a “eureka” moment between 1-6 months after the balance transfer when they figure out that purchases are charged at a much higher rate. Only then did those folks stop making new purchases on the card.
Always remember that although your balance transfer may be at 0% APR, your purchases probably aren’t. Additionally, your payments go towards the lower promotional balance first, meaning your higher rate purchases will continue to accumulate interest until the balance is paid off. So if you take advantage of a low rate balance transfer offer:
- Keep careful notes of when that promotional rate expires and make sure to pay off the balance before that date
- Don’t make any new purchases on the card. When you get the card, put it in the sock drawer and forget about it.
- Make sure to make your payments on this card on time. If you pay this card late, the default interest rate of 20%+ will likely apply. Also make sure you pay your other cards on time as well, since many cards practice universal default where they can hike your interest rate for paying someone else late, too.
I am thankful that my obsessive-compulsive accountant personality has always kept me out of trouble. I will do balance transfers and make the payments on time and charge nothing else to the card, and pay off the entire balance before the promotional rate expires. I guess not everyone is like me. For those who get into trouble, a debt consolidation loan may be in order as discussed at creditloan.com.