Is That Balance Transfer Worth It?

Updated on November 22, 2006.

Unlike most folks who automatically tear up the convenience checks their credit card companies send them, Stoller is always on the lookout for juicy 0% APR offers. When one arrives, he writes the check out to himself and deposits it in a high-yield savings account. Then, before the promotional period expires, he withdraws the amount needed to repay the balance — and keeps the interest. Within a year, this tactic earned him $900. "You don't get rich on it," he says. "But it's gift money."

Many people think balance-transfer checks can be made payable only to other credit card companies to pay off existing balances. Not so. In most cases, you can write such a check to pretty much anyone, including yourself, says Curtis Arnold, founder of CardRatings.com, a Web site that compares credit-card offers. If you play things smartly, your credit cards just might be the cheapest sources of short-term borrowing around.

When Arnold and his wife got married, they used 0% APR convenience checks to pay for their wedding. "[It was a] cheap way to finance a wedding, which, as we discovered, can be a very costly undertaking," he says.

But while 0% APR convenience checks can be a means to lower interest payments or even make a quick buck, they can backfire on you if you're not aware of the pitfalls. Here's what you need to know about these offers — and how to use them strategically.

Getting Into the Game
Credit-card companies are generous when it comes to balance-transfer offers. Nearly 50% of all solicitations mailed out to existing or new card members between January 2005 and September 2006 offered promotional rates for both balance transfers and purchases, according to Mintel Comperemedia, which monitors direct-mail solicitations nationwide. (An additional 11% threw in a promotional low rate on purchases.) About 86% of the balance-transfer offers were at 0%, and about 6% of them were at 2.99% APR or lower.

Whether you receive such solicitations depends on which card companies you use, as well as your credit history. Here's a technique used by credit-card expert Scott Bilker, founder of DebtSmart.com, to bring a steady flow: When he gets a new credit card, he uses it for the first couple of weeks, pays it off and lets it sit idle for a while, leaving the credit-card company to worry that the card has been retired to the back of his wallet. Invariably, the checks start arriving, he says.

The Fine Print
There's a good reason why credit-card companies clog their card members' mailboxes with 0% APR offers: if you read deep in the fine print, you'll see that those sweet deals can be a big moneymaker — for the creditor.

The plumpest hens are those card members who already carry balances or continue charging in the future. That's because when you transfer a balance at a promotional rate, and your regular purchases carry a higher rate, your monthly payments will go toward the balance that carries the low, promotional rate, Bilker explains. In other words, if you transferred $10,000 to a card that carries a 13% APR for purchases and continued using the card, your monthly payments would apply to the $10,000 balance at 0% APR first, while your purchases would continue accruing interest. In effect, the true APR for your balance transfer would be higher than 0%. (To see for yourself, crunch your numbers in our calculator below.) Bilker's advice: whenever you're planning to transfer a balance, make sure the card that you're transferring to is paid off before the transfer is complete and then "leave that card alone until it's time to pay [the low-rate transfer] off."

Bilker estimates that if you were to transfer $4,000 to a card that carries a 9.99% rate for new purchases and make the minimum monthly payments (usually these are 2% of the total credit card balance), you would accrue $3,548.66 in new charges (assuming you charge a mere $50 a month) while paying off the transferred balance. The true APR you'd pay in that scenario: 4.58%. That's still better than 9.99%, but it isn't the 0% APR deal you signed up for.