There is a reason why a credit card is willing to offer you such a screaming hot deal - they want your business because they know they can probably make money off you. Credit cards, like all businesses, keep metrics on their cardholders and are able to distinguish how much they can make from each person based on their demographics and prior spending history, it’s with this information that they feel confident offering deals like low interest rates on balance transfers because they know they’ll come out ahead in the end. So, what are some of the dangers of 0% balance transfers?

The first danger is that you’ll do something stupid, that is, you’ll do something other than put that money in a savings account offering a guaranteed interest rate and protection of your principal. Some stupid ideas include spending it, putting it in the stock market, putting it in a mutual fund, or trying to get more for your money than the bank’s interest rate. It’s tempting… but don’t do it!

The second danger is that you mis-read the offer and take one with a transfer fee, sometimes a 3% fee, that cuts into your earnings significantly. If you’re only getting 4% on your money and you have to pay a 3% fee, that means you’re only really earning 1%… a 1% that gets eaten away by the taxes you’ll pay on the 4% earnings. So, read the offer carefully and make sure that, if it has a balance fee, that balance fee has been waived for whatever offer you’re applying for. To avoid this, use sites like Zero Fee Balance Transfer as a starting point (double check those rates as they might change but it’s a decent starting point).

Finally, the third danger is that you forget to make a payment or continue to carry the debt after the promotional interest rate period. If you forget to make a payment, the rate will usually increase to whatever the regular rate is. If you forget to pay off the debt and the promo rate drops, you run the risk of cutting into your earnings by paying interest. So, be diligent and you won’t run into this problem.

Those are the major dangers of using a 0% balance transfer, be aware of them and you likely won’t fall prey to them.

If you’re using a balance transfer, say one of the in vogue 0% interest, no fee balance transfers, to pay off some of your existing debt, good for you. Nothing gives you more breathing room than a twelve month balance transfer that lets you put all of your payments towards the principal, but it’s crucial that you don’t spend any more money on credit or you will be digging yourself into a deeper hole - which are steps in the absolute wrong direction. See, the point of a 0% balance transfer is to make it so that all of your payments are going towards principal, if you’re increasing that principal while you’re making payments… isn’t that counter productive?

What’s also doubly bad is that if you make purchases on the card that you took the balance transfer, you actually pay off the 0% interest debt first and your purchases accrue interest at the regular interest rate, which can be very very high. So, if you have to spend, don’t do it on the card with the transfer and try to keep it to a minimum.

I’ve seen advice out there that doesn’t recommend that you take on more debt to pay off existing debt and I think that’s a bunch of baloney, who’s writing those articles? Credit card companies? It’s math… if you’re borrowing debt at 20% and you can borrow more debt at 19.99%, then borrow debt at 19.99% and pay off your 20% debt! While that is a drastic example, considering your time is worth something, you really should look into ways of reducing your debt’s servicing costs (the interest rates) so that you can accelerate your schedule of paying down the debt. So, why do places advise that you shouldn’t borrow money to pay down debt? I have no idea because you can’t argue against the mathematics! (no better way than to use 0% balance transfer deals)

For a prime example of how you can pay off your debt faster by borrowing, look no farther than Tricia from Blogging Away Debt. By borrowing from numerous sources, including Propser.com, and simply asking her credit cards to lower their rates, she was able to reduce her monthly interest payments from $400 to $100, on a debt of nearly $25,000!

So should you borrow money to pay off debt? Only if you want to save money!

On my other blog I’ve written extensively about taking advantage of 0% balance transfer offers and it’s something I’ve touched upon here a few times in the past but now it’s time to bust out the 0% Balance Transfer Arbitrager’s Toolkit - a set of links (all to my other blog) that will help you figure out how to take advantage of the 0% offers given by the credit cards.

1. First, read this introduction to 0% balance transfer arbitraging to learn about how the whole thing works.
2. Now that you understand the concept, consider opening up an account at Emigrant Direct or ING Direct. There are referrals to ING Direct where you can get $25 for a $250 deposit, no such offer exists for Emigrant.
3. Now, start applying for some of the cards on this list of cards with 0% balance transfer offers. I recommend Citi over Discover because Citi will write a check and send it directly to you.

You might have seen that term, 0% balance transfer arbitrage, floating around the internets, one personal finance blogs, on quick money blogs, on any number of sites that deal with money and getting more of it. 0% balance transfer arbitrage is where you take advantage of an offer to earn a little more money for yourself on the side.

In the beginning, credit cards offered promotional 0% offers to folks who were willing to roll over their existing credit card debt to their card. The reason for this was that after the promotional period, the card holder would likely stick with the new card and thus make their interest payments to them. This is a win-win for both sides - cardholder gets 12 months of 0% financing, credit card company gets to earn interested after the promotional period.

Enter in the savvy credit card user. Now, with the ease with which you can get a balance transfer, many folks are getting a 0% balance transfer check and depositing it with a high yield savings bank like ING Direct. What this means is that you’re borrowing money at 0% and earning 4.6% (some accounts have as much as 5.05%) on it, a $10,000 balance transfer would net you $460 for absolutely no work whatsoever. $460 is nothing to sneeze at.

Are there pitfalls? Certainly, the effect on your credit score will be negative - but if you don’t plan on getting any big loans in the near future, this could be an easy way to boost your cash flow with little risk. Another pitfall is not watching the terms closely, there are cards that will give you a 0% balance transfer but charge you a fee, which can kill the deal. It’s important to double check that you’re getting a no fee balance transfer when you execute it.

This is part of a series of articles taking a closer look at the tips provided by Bankrate’s Debt Counselor’s 15 tips article.

1. Freebies are lethal.
Those low introductory offers sound great, but they are designed to get you hooked on the service. The ploy works way too often, says Elaine Rutter, a certified consumer credit counselor with the Consumer Credit Counseling Services of Central Pennsylvania.

“I see people with cable, Internet and cell phones paying several hundred dollars a month,” she says. The consumers tried the service at the initial low price and kept it on even after the bill went back up to the normal rate.

Be sure you can afford the extra bill with your current income and budget.

This refers to not only teaser promotional rates for credit cards but all sorts of services. I think it’s crucial for a savvy consumer to check what the rates are after a promotional offer, if they’re the same as what you’re paying now then by all means snatch up the offer.

In many cases, especially with 0% balance transfer offers, you’re just looking to get a 0% respite for a year or six months so that you can catch up or pay off a bigger chunk. I think in those instances it is very important to take the deal if you can because in the end it will help you. This tip is just warning you about seeing a “too good to be true” teaser or promotional rate and then getting suckered in after the rate ends.

This is part of a series of articles taking a closer look at the tips provided by Bankrate’s Debt Counselors’s 15 tips article.
Source: Bankrate