If you’re looking to consolidate debt, you’ve likely seen offers from a variety of credit card companies touting various balance transfer deals. Some offer 0% APR for six to as many as 15 months, while others offer a low fixed rate for the life of the loan balance.
This is where things get somewhat tricky. You really need to assess your current debt situation to decide which will help you save more money. Let’s take a look at the pros and cons of each type of offer to determine which will work best for you.
0% APR Credit Cards
0% APR credit cards are certainly a good deal, as they allow a consumer to pay zero finance charges during the promotional period, which as I mentioned earlier, could be for as long as 15 months. But what happens after that promotional period comes to an end?
Often times little of the debt is actually paid off and consumers find themselves scurrying to move the debt to a new credit card. And each subsequent balance transfer may result in a balance transfer fee, which is typically between $5-$75 or even more now that fees are on the rise.
The good news is that there are no fee 0% APR balance transfer credit cards out there if you keep your eyes peeled, though they’re becoming a bit of a dying breed. And even if you do have to pay a balance transfer fee, the benefit of paying zero finance charges may outweigh the cost of a low interest rate credit card.
One final perceived negative issue with the 0% APR credit cards is that consumers may be more prone to let the debt build up, as there are no related finance charges to act as motivation to pay it off. But that’s just human nature, not necessary measurable.
Low Interest Rate Credit Cards
That brings us to low interest rate credit cards, which above all are favored for their fixed rate. The fact that the interest rate, or APR doesn’t change for the life of the balance transfer is a big plus, especially if you secure a super low rate. These offers typically carry no associated balance transfer, which for some may be the selling point. But a fixed low rate does carry finance charges, which though small, can add up over time.
Imagine a credit card balance transfer that offers a 2.99% fixed rate for the life of the balance. That means you can hold the balance for as long as you’d like until it’s paid off, paying only 2.99% APR. That’s certainly a good deal, and much better than the standard APR on credit cards which fall in the teens or higher. But those finance charges can still catch up to you.
If you have a balance of say $5,000 on the low fixed rate of 2.99% for the life of the loan, you’d be paying roughly $150 a year, not accounting for accrued interest or early payoff. So even though you may have avoided a balance transfer fee, the finance charges alone double the average balance transfer cost in as little as 12 months.
The American Express Clear is a credit card with a low fixed-interest rate for the life of the balance transfer, and carries no balance transfer fee.
Conclusion
I’m sure it’s tempting to go after a low interest rate credit card, but you really need to do the math before you decide which offer to take. Map out a 12 month plan (or longer) of how you plan to attack your debt. You may have a goal to pay it off in less than 12 months, or you may just want to make the minimum payment and let it ride.
I’ve tried both, and I can say that the 0% APR balance transfer is my offer of choice, though it does seem to take a bit more work than the fixed interest rate option. You have to stay on your toes, and make sure you transfer the balance before the promotional period ends to avoid costly finance charges. That also entails opening new credit card accounts in some cases, and incurring more fees. But all in all, it can be worth it depending on your situation.
One final tip. If you do plan to execute a balance transfer, consider the offers available with your current card issuers. Usually their deals are just as good, if not better than other deals out there, and they can help you avoid opening a new credit account, which can harm your credit score.
