Editorial Policy

Looking for a 0 APR Balance Transfer? Avoid This Major Blooper

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By Eva Norlyk Smith, Ph.D.
July 13, 2010

The 0 APR balance transfer for years has been the gold standard of credit card offers, offering a cheap, or even cost-free, loan for as long as 18 months. These days, however, taking advantage of a 0 APR credit card offer is venturing into far more treacherous territory. If you don’t stay on your toes, that great 0 APR balance can turn into a credit card debt disaster, with interest spiraling upwards at 29.99 percent a year.

Due to a little recognized loophole in the Credit CARD Act, promotional credit card offers have turned into a credit card penalty rate trap. One of the major goals of the Credit CARD Act was to protect cardholders from aggressive credit card interest rate increases for minor offenses. It used to be that card issuers could levy default rates, typically running as high as 29.99 APR, on cardholders for small infractions like paying late a couple of times in a row, or even having late payments on another bill or credit card (the so-called universal default clause). The Credit CARD Act eliminated much of this risk by outlawing universal default clauses and stipulating that card issuers no longer would be able to increase interest rates on existing balances, unless a cardholder is 60 days behind on credit card payments. In addition, while card issuers can raise rates on future charges, they must now give cardholders 45-day notice and the option to cancel their credit card before the changes take into effect.

There is one major exemption to this rule, however: promotional offers. Special credit card offers and introductory rates are not subject to the new rules of the Credit CARD Act. In short, card issuers are still allowed to raise rates on existing card balances for even small transgressions, like a late payment. For some card issuers, a late payment will automatically trigger rate increases on new charges as well.

Worse, there are no rules for how much the interest increase can be, a fact that some card issuers have been quick to take advantage of. The upshot is that for many of today’s 0 APR offers, it’s one strike and you’re out. Cardholders making a single late payment on a card with a 0 APR balance, even if only a day late, may find themselves saddled with a default rate of 29.99 APR or even higher. And, it is not only 0 APR intro offers that put cardholders at risk. Any offer of a lower promotional rate under the credit card law can be subject to the same terms.

In short, if you take out a $10,000 0 APR balance transfer and make a late payment, that great credit card deal could now cost you as much as $3,000 a year in interest charges (or more, since cardholders unable to pay off the balance will be stuck paying interest on the accumulating interest as well).

How can you protect yourself if you are considering taking out a 0 APR balance transfer? Here are a few tips to avoid getting stuck with an impossibly high credit card interest rate.

  1. Read the terms carefully. Not all 0 APR credit card offers are created equal. Some card issuers are much more aggressive with penalty rates than others. Major card issuers, still smarting from the economic downturn, are looking for ways to shore up their bottom line. Don’t let it be on your expense. Read the terms for the promotional rate carefully, and if the terms state that a late payment can trigger penalty rates, take your business elsewhere.
  2. Check balance transfer offers that offer a higher rate. Many credit unions and smaller banks offer a higher promotional rate, such as 4.99 percent. While these offers may not seem as attractive, they are ultimately better, if it means that the terms are more user-friendly and the lender more tolerant of minor slip-ups, such as a late payment.
  3. Sign up for automatic credit card payments. Once you do take out a promotional offer, sign up for automatic payments to eliminate the risk of late payments. Be aware that once the promotional rate expires, the minimum monthly payment goes up, so don’t choose a fixed monthly payment, which might get you caught paying too little on the card each month (also considered a late payment). Instead, choose the option to pay the minimum payment each month.
  4. Have a back-up plan in place. It’s never a good idea to take out a 0 APR balance transfer offer without a plan for how to pay it off before it expires, or at least within a year. Nowadays, it is necessary to also have a back-up plan in place for how to pay off the balance faster, should your rate get increased. And don’t let that backup plan be to simply apply for another 0 APR card with another card issuer; the more you need that balance transfer, the less likely you are to qualify.
  5. Call your card issuer. If disaster strikes, call your credit card issuer. If it is a minor infraction, and you are otherwise considered a good customer, they may agree to lower the card interest rate. If not, and if it is truly a minor infraction, report the instance to the Better Business Bureau, your State Attorney General’s office, and the soon-to-be-created federal Bureau of Consumer Financial Protection.