A zero interest credit card is a source of short term interest avoidance. Lenders offer a promotional rate for a defined period of time in order to attract new, high value customers from other financial institutions. The lender benefits from attracting customers who are far less likely to default on their credit agreement and the borrower enjoys a zero percent balance transfer.
Zero Interest Credit Card Transfer Fees
A low rate balance transfer is not be a free transaction. The new lender normally charges a transfer fee of approximately 4% to cover their administrative expenses. However, this fee has started to creep-up in recent months. It is necessary to factor in this charge when determining how much is saved with an interest free balance transfer credit card. The fee will be added to the new balance so the amount owed will increase in the short term. The 0% balance transfer is initiated by the new provider and typically takes 30 days to complete.
Low Rate Balance Transfers for Excellent Credit Scores
As already alluded to, only those with a good credit score will be accepted for a zero percent balance transfer. This is to reduce the likelihood of default and any resultant bad debt problems. This means that the majority of consumers who have missed/late payments, have entered a debt relief program or have filed for bankruptcy will find that their application is declined. It may be possible to qualify for an interest free balance transfer credit card in the future, but it will be necessary to perform credit repair first. Bad credit won't show on a credit report after a period of 7 years has elapsed.
Clear Credit Card Debt with a Zero Percent Balance Transfer
Performing a series of low rate balance transfers is an affective way to clear debt. The July 2008 Consumer Action credit card survey revealed that the typical interest rate on charge cards is 13.54%. This means that, after taking into account fees, it is possible to save 10% per annum in debt interest payments through a zero interest credit card. On a $5,000 balance, an additional $500 can go towards getting out of debt every 12 months.
Terms of Interest Free Balance Transfer Credit Cards
The recent legislative changes by the Obama administration may result in changes to the T&C's of low rate balance transfer deals and a reduction to the interest-free period. This is likely to happen because other ways to make money have been severely restricted by the new laws.
Clear Debt with a Zero Rate Credit Card?
A zero percent balance transfer deal reduces the amount of interest paid and will save the borrower money. However, it is important to carefully check the terms and conditions to see if there are any new clauses that could invalidate the agreement. For example, a late payment could invoke a universal default clause which may mean that the benefit of a low rate balance transfer is completely lost.
Sources
"Credit card statistics, industry facts, debt statistics." CreditCards.com.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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