The 0% introductory interest rate on balance transfers is a common feature of many credit cards targeted to consumers with good to excellent credit. While this offer looks great on the surface, people who take advantage of it might find themselves on the hook for unexpected interest charges.
The problem is that transferring a balance means carrying a monthly balance, and carrying a monthly balance—even one with a 0% interest rate—can mean losing the credit card’s grace period and paying surprise interest charges on new purchases. Here’s what you need to know about this potential situation and how to avoid it.
Balance Transfers Change the Grace Period
The grace period is the time between when your credit card billing cycle ends and when your credit card bill is due, during which you don’t have to pay interest on your purchases. By law, it must be at least 21 days. You only get the grace period if you aren’t carrying a balance on your credit card. What many consumers don’t realize is that carrying a balance from doing a promotional balance transfer—not just from making purchases—can mean losing the grace period on any new purchases made with the card.
With no grace period, if you make any purchases on your new credit card after completing your balance transfer, you'll incur interest charges on those purchases from the moment you make them. When that happens, some of the money you’re saving by having a 0% interest rate on the balance transfer will go right back out of your pocket.
The only way to get the grace period back on your card and stop paying interest is to pay off the entire balance transfer as well as all your new purchases. If you had enough cash saved up to do that, you probably wouldn’t have done the balance transfer in the first place.
- Balance transfers can help you pay down debt and avoid paying interest during a promotional period but they can involve transfer fees and unexpected costs.
- Unless the new credit card to which balances are transferred has a 0% APR offer on purchases as well consumers could forfeit their grace period on new purchases.
- If the new card doesn't have a 0% APR on purchases it would probably be best to avoid using for new purchases until the transferred balance is paid off.
Balance Transfer Math
A Transfer Can Save you money…
Say you have a $5,000 balance on a credit card with a 20% APR. Carrying that balance is costing you $1,000 a year at this rate. Then, you get a 0% balance transfer offer on a new credit card. You can move your $5,000 balance to the new card and you’ll have a whole year to pay it off with no interest. You just have to pay a 3% fee to transfer the balance, which amounts to $150. (Balance transfer fees typically range from 3% to 5% of the amount transferred.)
Even after the fee, you’ll come out way ahead by not paying interest for a year, as long as you put about $415 per month toward your $5,000 balance so that it’s paid in full by the end of the promotional period.
…Unless You Buy Something Else on That Card
Let's say you need to spend $150 on toilet paper, paper towels and other household essentials during a routine shopping trip and you charge it to your new card, the same card to which you’ve transferred the balance.
You assume that, if you pay off the $150 when your bill comes due in three weeks, you won't owe any interest on the purchase—after all, you just made it. And you know you’ll have the money because your financial situation has improved since you racked up that $5,000 balance. You were unemployed then; you have a job now and you’re not taking on new debt, just cleaning up the past. You just charged the purchase to your card for convenience.
But when your credit card statement arrives, you find you’ve been charged 15% APR—your new card’s interest rate on purchases—on your $150 purchase. It’s a small amount, but what if you had charged your child’s college tuition for the semester? Plus, there’s the principle of the thing: If you’re going to pay interest or fees to a credit card company, you want to do it knowingly, not because the company caught you off guard.
The rules governing this process are spelled out in the fine print. Credit card companies used to routinely apply payments to the lowest-interest balances first, in which case any amount over the minimum payment would go toward the balance transfer amount, and any purchase balances would keep sitting there accruing interest at the higher interest rate until paid off. However, with the advent of the Credit Card Act of 2009 issuers must first apply payments above the minimum amount due to the highest interest rate balance.
The Consumer Financial Protection Bureau (CFPB) says many card issuers don't make these terms clear in their promotional offers, and that it plans to continue cracking down on card issuers. It calls card issuers' failure to clearly disclose the loss of the grace period "deceptive" and potentially "abusive."
Credit card issuers are required to tell consumers how the grace period works in marketing materials, in application materials, on account statements and with balance transfer or cash advance checks, the CFPB states. It says some issuers aren't doing so in a way that consumers can easily understand. In fact, the fine print might not even use the term “grace period.” It might say something like “avoiding interest on purchases.”
Also, bear in mind that many balance transfer offers don’t guarantee that you will actually receive a 0% balance transfer for the maximum number of months in the introductory period. Your credit score determines what you actually get. Unless you have excellent credit, you could wind up with a low-interest balance transfer for a fraction of the time you expected.
Decoding Grace Period Terms
Here's a real-life example from Discover that indicates you will pay interest on new purchases, with no grace period, if you take advantage of a balance transfer offer:
“You can avoid interest on new purchases you make if you pay your entire balance in full each month. This means unless you have a 0% introductory purchase APR, you will pay interest on new purchases if you do not pay the balances you transfer under this offer in full by the first payment due date.”
Citi puts it this way:
“If you transfer a balance, interest will be charged on your purchases unless you pay your entire balance (including any balance transfers) by the due date each month or you have a 0% promotional APR on purchases.”
Wells Fargo is somewhat clearer—and at least uses the term "grace period":
“If you transfer amounts owed to another creditor and maintain a balance on this credit card account, you will not qualify for future grace periods on new purchases as long as a balance remains on this account.”
Keep in mind the CFPB’s warning that consumers may not be able to find the information they need in the fine print. Sometimes these statements aren’t even in the credit card offer itself, but elsewhere on the credit card issuer’s website, such as in a help, FAQ or customer service area.
Avoiding the Balance Transfer Trap
If the terms of the grace period for purchases after you do a balance transfer are unclear to you, you have three options:
1. Pass on the offer and look for one with clearer terms.
2. Take the 0% balance transfer offer, but don't use the card for any purchases until you've completely paid off the balance transfer.
3. Choose a credit card that offers a 0% introductory APR for the same number of months on both balance transfers and new purchases. Numerous such offers are advertised in the market.
The Bottom Line
If you want to accept a balance transfer offer, don’t assume that the only costs are the balance transfer fee plus the interest rate, if any, charged on the transferred balance. If you use the card to make new purchases, be aware that you may incur interest on those charges from the day you make them, rather than getting the interest-free grace period you normally receive when you pay off your purchases in full, on or before the billing due date.
The fact of the matter is that not all credit cards are created equal, and some balance transfer cards are better than others. It's best not to apply for any new credit card with the goal of using its balance transfer promotion until you know exactly how balance transfers work with the issuer and if the transfer will eliminate the grace period on any new purchases.