A credit card balance transfer with a 0% annual percentage rate (APR) seems like a great deal: Pay 0% APR on transferred balances for up to 21 months. These offers can, in fact, be tremendous money-saving tools if used wisely. Understanding what’s in it for the bank and credit card company before signing up, however, can help avoid costly mistakes.
- Credit card companies make money not only from interest but also from merchant swipe fees, called interchange, when purchases are made.
- Consumers who opt for a 0% transfer should understand that the interest-free period is only for a limited time.
- Banks track these offers and know the odds of consumers paying off their balances in full before the promotional period expires are in the banks' favor.
What the Company Gains
Credit card companies have several money-making reasons for offering to let customers transfer a balance from a competitor’s card and pay no interest on that balance for a year or longer. “Credit card companies offer 0% balance transfer offers as a way to entice you to apply for their credit card,” says certified financial planner Colin Drake of Marin Financial Advisors in Sausalito, Calif.
Then they make money from interchange fees that retailers pay on every purchase that a consumer charges to a credit card, from balance-transfer fees, and from customers who don’t pay off the balance before the introductory period ends, thus having their remaining balances subject to the banks' regular interest rates.
“In most businesses, the cost of acquiring a new customer is high. Credit card companies are willing to pay that cost through advertising their 0% APR cards and then allowing you the use of the promotional APR for a limited time," Drake says. "They’ve done all the research they need to realize that this seeming loss-leader investment will very likely lead to very profitable customer relationships for them.”
While the balance under a 0% APR balance transfer offer won’t accrue interest during the set period as long as every minimum payment is made on time, credit card companies usually charge consumers for moving the balance from the old card to the new card. A 2018 CompareCards study showed that the average balance-transfer fee is 3.46%, meaning that every $1,000 transferred creates an average of $34.60 in balance-transfer fees.
The credit card's annual fee, if it has one, is another opportunity for the card issuer to make money when a balance is transferred to a new card. Luckily, a majority of balance transfer cards do not charge annual fees.
Late Payments Are Big Money
Transferring a balance to get a 0% introductory rate for 12 months doesn't mean just forgetting about the balance. The cardholder has to make minimum payments before the due date every month or they lose the 0% rate and might have to pay a late fee. Losing the 0% APR transfer promo rate means the cardholder will start paying interest on the transferred balance at the penalty rate unless the card comes with a no-penalty APR.
Consider scheduling automatic minimum monthly payments. Even with such payments in place, set a calendar reminder to make sure each payment goes through before the due date, and make sure to have enough in a checking account to cover the payment.
Banks Love to Cross-Sell
Once a bank has a credit card customer, it might look to get that customer's business in other ways: a personal checking account for which the customer pays a monthly fee; a savings account that earns little interest for the customer as the bank lends that money out at a higher rate; or an auto loan or mortgage on which the cross-sold customer pays interest for years, even decades. Not to mention a home-equity line of credit or another credit card that racks up a balance and interest.
There’s nothing inherently wrong with any of these products or that banks make money from them, but any time a bank signs up a customer for one of its products, it has the opportunity to create a long relationship of cross-selling. That hope of additional business is another reason for 0% APR balance transfer card offers.
Are You a Revolver or a Transactor?
“Revolvers,” in credit-card industry lingo, are consumers who carry a balance on their cards month to month. They accrue interest on their balances, which adds to banks’ bottom lines.
“Transactors” are far less profitable because they simply use their credit cards as tools for making purchases and possibly earning rewards. Transactors pay off their balances in full and on time every month. The only money creditors earn from these consumers comes from interchange fees. Transactors get a free ride from the card’s interest-free grace period. Some even make money from credit card one-time bonuses. But, it's been shown that consumers with rewards credit cards spend a lot more on their cards vs. those without rewards. The interchange revenue is transactors generate are enough to make them profitable customers, albeit less profitable than revolvers.
Credit card companies have several money-making reasons for offering to let customers transfer a balance for 0% APR.
“Banks covet cardholders who revolve balances while paying their minimum payment on time,” says Kevin Haney, who spent more than a decade as a sales director at Experian, one of the big three credit bureaus. He now shares insights as a credit bureau insider at the website Growing Family Benefits.
“Revolvers are far more profitable than transactors,” he says. “The [0% balance transfer] offers represent the most cost-effective way to increase revolving balances that generate interest revenues.”
Who's Likely to Lose
Most people go into a 0% APR balance transfer offer expecting to come out ahead, but will they? “Banks track and measure results of these offers and know from experience the percentage of people who will win or lose the game,” Haney says. “Winners take the offer and repay the balance in full before the introductory period expires, or they take advantage of another 0% APR offer and transfer the balance to another bank. Losers pay the transfer fee and then resume paying interest on the balance after the introductory period expires.”
Banks count on consumers overestimating their own strengths and underestimating their own weaknesses (aka “superiority bias”). Most people accepting the offers see themselves as winners in the game, but statistics from years of tracking these offers show that most end up as losers, says Haney.
The Bottom Line
In the world of temporary 0% APR offers, credit card companies aren’t rooting for consumers to succeed. Read and understand the offer’s fine print, and comb the credit card issuer’s website for additional information on how it handles balance transfers. If understanding these offers doesn’t come easily to a consumer—or if they haven’t overhauled the spending behaviors that got them into debt—they might be more likely to come out ahead by simply paying down existing balances as fast as possible.