If you’re spending a lot of money every month on credit card interest, transferring your balance to a new card with a zero percent interest probably sounds enticing.
But is it right for you? Probably, but not necessarily, says Beverly Harzog, Credit.com’s credit card expert. Switching cards is not as simple as it sounds. And if you do it wrong, the maneuver could cost you more money than it saves.
Before you do a zero-interest balance transfer, here are eight important things to consider:
1. Know your credit. A balance transfer makes the most sense if you fit this profile: You have an excellent credit score, plus a high balance on a card with a high interest rate. Your great credit score gives you lots of options, since most credit card issuers would love to have you as a customer. And your big balance and high interest rate give you plenty of reason to switch.
“The best offers are for people with excellent credit,” Harzog says.
As your credit score declines, so does your list of options. Once you’re in the “fair” credit range, usually between around 650 to 699, you may have trouble finding credit card issuers willing to offer you a zero-interest transfer.
If that’s the case, a transfer might still make sense, Harzog says, if you can chop your interest rate down, say from something over 20% to something under 10%. Depending on the offers you find, it might make sense to take some time to improve your credit score, so that you can find the best deal when you eventually do switch.
2. How long will zero interest last? Many card issuers offer balance transfers with zero interest for the first six months. At least one, the Citi Diamond Preferred Card, gives zero interest for up to 21 months. That’s a big difference.
3. Does zero interest apply to new purchases, too? If you’re looking at switching cards, there are two different interest rates to consider. First is the rate on the principal you’re switching over. Second is the rate on all new purchases you make with the card. Sometimes those two rates are the same, but usually they’re different, Harzog says.
Ideally the rate for new purchases won’t matter, says Harzog, because the purpose of most balance transfers should be only to pay off your existing balance, not racking up new debt.
“The goal of a zero-interest balance transfer is to pay off your debt, not to make new purchases,” Harzog says.
Still, emergencies do happen, so you should consider the interest on new purchases. If it’s significantly higher than what you’re paying now, and you foresee some unavoidable spending in your near future, maybe a switch isn’t the best idea right now.
4. Can you pay it off in time? Since the goal here is to pay off your balance, can you actually do it? Divide the amount you owe by the number of months you’ll get without paying interest. Can you get to zero, or close to it before the introductory rate expires?
5. What’s the “go-to” rate? This is the rate the credit card resets to after the introductory zero-interest period is over. Compare it to the rate you’re paying now to make sure you’re not taking on too much risk.
6. What’s the fee? Zero interest does not mean free! Occasionally you may find a balance transfer offer that doesn’t charge a fee, Harzog says. But in most cases, the issuer will charge a fee equaling 3% to 5% of the principal. If you’re paying a high interest rate, it’s probably worth it.
“Its rarely free,” Harzog says. “But if you’re not paying interest, most likely you’ll come out ahead.”
7. Mind the box. The Schumer Box, located at the top of the balance transfer offer, will tell you when the offer expires. That’s important, because balance transfers take time. Make sure you have enough time to fill out the application, get it approved, and get your debt switched to the new card before the expiration date.
“You need to give yourself several weeks for the transactions to take place,: Harzog says.
8. Don’t just drop your old card. Keep making payments on your old card until you’re absolutely sure your balance transfer has been switched over. If you ignore the envelopes in the mail from the old issuer, you may have a little debt left, especially if you make a few last-minute purchases on it. That can turn into late fees, and even damage your credit score.
Just to make sure, Harzog recommends you call the old card company to check that the switch is complete and that there are no other miscellaneous charges or interest remaining on the card.
“Until you see there’s zero balance, pay it,” she says.
Image: The Consumerist, via Flickr