Rising interest rates could mean shorter 0% APR promotion periods.
In the past, credit cards offering 0 interest on balance transfers have been a good way to consolidate debt. Zero percent APR periods meant card users could consolidate existing debt and pay it off quickly interest-free. However, credit experts believe that the heyday of balance transfers could be coming to an end. Market conditions are changing, which could lead credit issuers to change balance transfer credit cards, too.
What is a balance transfer credit card and why is it beneficial?
Balance transfer cards offer 0% APR periods on balance transfers when you first open the account. You transfer balances from your existing accounts to the new card for a small fee; fees typically range from $3 to 3% of the balance transferred. During the introductory promotional period, no interest charges apply. That means that 100% of every payment you make goes to eliminating principal (the actual debt you owe).
This has made balance transfer credit cards a good way to consolidate debt for borrowers with good credit scores. Credit cards offering 0 interest on balance transfers usually have promotion periods that range from 6 to 21 months. If you owe less than $10,000, this is often the most effective way to get out of debt because it eliminates interest charges completely.
Let’s say, for instance, you owe $10,000 and have an excellent credit score. You qualify for a card that offers 0% APR for 21 months. Even if the card applied a 3% balance transfer fee, you could still be debt-free before the promotion period ends with payments less than $500.
What’s changing and how does it impact balance transfers?
A new report in CNN Money released last week warns that credit issuers may tighten up restrictions and terms on these cards. Robert Harrow, a credit card analyst from Value Penguin says, “Several forces are coming together to make the terms of balance transfer cards less favorable for consumers.”
Basically, rising interest rates from the Federal Reserve will decrease the profitability of balance transfers for financial institutions. Higher rates make it less beneficial for banks to let customers open balance transfer accounts that they may never use again once they pay off their transferred balance.
“These will lead to shorter 0% periods on balance transfer cards, less breathing room, giving people less time to pay off their debt,” Harrow explains.
So, even with excellent credit, you may not find cards with 0% APR promotion of 18-21 months. Instead, most interest-free periods will be less than a year. That gives you less time to pay off your debt. For example, let’s say you have that same $10,000 debt to repay. If you only have 12 months to pay it instead of 21, the monthly payments would be almost $850.
Finding the right way to consolidate
Debt consolidation can be extremely beneficial as you work to get out of credit card debt. But it’s only beneficial at the right terms.
“You need the right interest rate over the right period of time to make debt repayment faster and more affordable,” explains Gary Herman, President of Consolidated Credit. “Otherwise, you’re basically just spinning your wheels. You won’t get where you want to be quickly.
Herman warns that rising interest rates will also affect other do-it-yourself consolidation options, too. For example, rising rates on debt consolidation loans drive the monthly payments higher and increase total cost.
“Debt consolidation loans are only beneficial if the rate is low enough,” Herman warns. “As rates increase, these do-it-yourself options simply won’t be as beneficial as they were in years past. People who need to consolidate may increasingly need professional help to reduce or eliminate interest charges.”
Solutions like a debt management program allow consumers to consolidate debt, even with bad credit. Credit counselors negotiate interest rates with your creditors on your behalf. As a result, you can get low interest rates even when interest rates from the Federal Reserve are high.