A balance transfer card with a 0% introductory interest rate can be an excellent way to consolidate high-interest debt and efficiently pay it down. It can also be a way to avoid reality and rack up even greater interest payments in the end.
A new study by CompareCards.com finds that too many Americans are taking the latter path. The CompareCards 2018 Balance Transfer Credit Card Report shows that 2 in 5 Americans that have had a balance transfer card failed to pay off the full transferred balance before the introductory period expired.
“That was disappointing to learn,” said Matt Schulz, Chief Industry Analyst with CompareCards.com. “That means that lots of people aren’t getting as much savings from balance transfer cards as they could, and that’s a shame.”
Balance transfer cards carry a high annual percentage rate (APR) after the 0% period. Any remaining balance from the transfer will rack up interest at the higher rate.
According to the report, 22% of balance transfer cardholders paid most of their balance off in time, and 13% paid only some of it. These consumers saved money, but not as much as they could have saved with better spending practices.
“Job No. 1 for any credit cardholder is to pay your balance off in full as soon as possible,” Schulz said. “We all know that life happens sometimes, though, and it’s not always possible to pay balances in full, but that should always be the goal.”
Balance transfer cards can greatly benefit lower-income workers with a stable income but high debt loads. However, the report shows little difference in balance transfer card use between income levels. Less than one-quarter of consumers (22%) have used a balance transfer card at least once. Across all income groups, usage ranged from 20% to 27%.
One income-related statistic stands out. At the $100,000 and above income level, almost half of consumers (47%) used balance transfer cards multiple times. Higher-income consumers are more likely to be able to adjust spending and pay off transferred balances early. They are also more likely to carry higher balances and save more in total interest charges.
Why don't lower-income families take greater advantage of balance transfer cards? They may not have the income or ability to adjust spending to guarantee a balance transfer payoff in a suitable time – or they may not realize the benefits of balance transfer cards.
Balance transfer cards generally charge fees, which must be considered. Only 12% of the balance transfer cards in the report had a 0% transfer fee. The average and most common fee was 3% of the balance (offered by 111 of 165 cards reviewed). Lower-income consumers may see the fees and assume they won't save money overall.
The average 0% APR introductory period was 13.6 months, with 97% of 0% APR card offers extending at least a year. However, 71% of 0% APR offers have a "use it or lose it" deadline, and 28% of those deadlines are 45 days or less.
“Balance transfer cards can be a godsend for people with a lot of debt, but they can be tricky, too,” Schulz said. “People need to understand the rates, fees, deadlines and other nuances involved with the card or it’s easy to get tripped up and cost yourself real money.”
These statistics drive home the importance of planning with a balance transfer card – take advantage quickly and have a solid repayment plan.
Like any credit card, interest rates on balance transfer cards are based on creditworthiness. Keep your credit score as high as possible to receive the best offer. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
If you choose a balance transfer card, use it wisely. Plan out a realistic budget that allows you to pay down your balance in full, including any associated fees, before the introductory period expires. Follow all of your card issuer's rules to avoid forfeiting the 0% balance transfer period (such as failing to make payments or exceeding your credit limit).
Moving forward, new monthly charges must stay low. You must pay off new charges in full and have money left over to pay down the transferred balance. Otherwise, you're likely to end up with more high-interest debt than you started with – and fewer options for dealing with it.
If you want more credit, check out our list of credit card offers.