Americans are shunning debt in the aftermath of the financial crisis. Total credit card debt in 2012 was about $714 billion, down from nearly $900 billion in 2008. Add to that credit card companies looking for new customers, and the result is credit card promotions that can be risky for both lenders and consumers.
For those considering transferring debt to a zero percent card, here's what you need to know.
18 is the new 12. The longest zero percent offer available today is 18 months. These offers come from Discover and Citi. Chase offers a 15-month zero percent balance transfer, while a bevy of card issuers offer 12 months with no interest. Some cards offer transfers for the life of the balance, but these offers come with interest rates in the single digits.
There is no free lunch. With few exceptions, these offers charge what is called a balance transfer fee. The standard fee with most cards is 3 percent of the amount transferred. Transfer $10,000 to a zero percent card, and a fee of $300 will be added to the balance. Some cards, however, charge as much as 5 percent, so consumers should check the terms of the offer carefully.
In some cases, a card will offer what is called a no-fee balance transfer. These offers typically charge a low interest rate, say 4.99 percent, rather than offer no interest. In some cases, however, consumers can find a no-fee zero percent transfer deal. Currently, Chase is the only card issuer with such an offer.
Generally, these zero percent offers are still a good deal even factoring in the transfer fee. The key is determining whether the interest rate on the balance being transferred exceeds the cost of the transfer. With fees in the 3 percent range, zero percent transfers almost always make sense mathematically.
Good credit. Virtually all cards offering a zero percent transfer require excellent credit. While it's possible to snag one of these deals with a credit score in the high 600s, the average score for those approved falls above 700. There are some offers aimed at consumers with average credit (mid-600s), but these cards come with shorter transfer periods.
Benefits. Many transfer cards also come with additional perks. The Discover It and Chase Freedom cards, for example, offer up to 5 percent cash back on purchases (but not on the balance transfer itself). Some cards offer consumers cash bonuses if they spend a certain amount on the card in the first three to six months. While the transfer itself may be the most important feature, a card's other benefits are worth considering.
Other considerations. As attractive as no-interest offers are, there are some drawbacks to consider. First, applying for new credit can lower your credit score, at least temporarily. While this may not be a concern for some, those looking to buy a home in the near term may not be able to afford the drop in their credit score.
Second, there is no guarantee that a balance transfer card will offer a high enough credit limit to cover the debt being transferred. As a result, a consumers may need to apply for multiple cards in order to transfer their entire debt. Completing multiple card applications can, in turn, lower a consumer's credit score even more.
Finally, it's worth noting that card issuers do not permit a transfer from one of their existing cards. Consumers who want to transfer high-interest debt will need to apply for a card with a different issuer.
Rob Berger is the founder of the personal finance and investing blog the Dough Roller.