So, you racked up some holiday debt and want to use a balance transfer to dig yourself out. Since many balance transfer credit cards offer 0% APR for 12-21 months — and some even come without a balance transfer fee — your strategy makes sense.
After you transfer your credit card balances to your new balance transfer card, you’ll have the length of your card’s introductory offer period to pay down debt with no interest charges. (See also: How to Do a Balance Transfer, Step by Step)
Of course, it’s always wise to weigh the pros and cons — and the costs — of these offers. The most common cost is the balance transfer fee. While a few cards charge no balance transfer fees, most do. A typical a balance transfer fee is 3%-5% of your balance. So for every $5,000 you transfer, you’ll fork over $150– $250 in the form of an upfront fee. (See also: Comprehensive Checklist to Doing a Balance Transfer)
While the interest you’ll save by transferring your balance to a 0% APR card can make paying this fee well worth it, you should still do the math when evaluating whether a balance transfer is the right move for you.
Why you shouldn’t use a balance transfer credit card for purchases
But there’s another savings killer to be aware of. Using your balance transfer card for new purchases is one of the most common balance transfer mistakes people make. Do so, and you could wind up paying a lot of interest in ways you wouldn’t imagine.
Here are a few facts to consider as you transfer a balance and decide how and when to use your new credit card.
You’re adding to the very balance you’re trying to pay off
The top reason not to use your balance transfer card for purchases is because that’s working against your goals. If you transferred a balance to pay down debt, using your card for purchases is a lot like emptying buckets of water from a boat with holes. The more water you throw out (monthly payments), the more water (debt) seeps right back in through the holes. And you may even find that you pay down debt much more slowly than you rack it up.
The best way to get the most out of a balance transfer is to get 0% APR for as long as you can, minimize fees, and then stop racking up more debt. Focus your efforts on becoming debt-free and stick to cash or debit for a while.
Your payment may not go toward purchases, but instead to your transferred balance
Let’s say you transfer a $5,000 balance to a card that offers 0% APR on that balance for 15 months, but charges 16% APR on new purchases. Once you get the card in the mail, you use it to buy a $500 lounge chair for your living room.
At this point, you have a balance of $5,500, and a minimum payment of $165 (3% of your balance, which is a common way banks use to calculate your minimum payment). The good news is, because of the Credit Card Act of 2009, anything over your minimum payment must go toward whatever balance has the highest interest rate. The bad news is, your minimum payment can go toward the balance with the lowest interest rate.
In this case, your $165 payment would go toward your 0% APR balance and your $500 purchase will start racking up interest at a rate of 16% APR. The only way to avoid this would be to pay your minimum payment, plus the entire balance you’ve charged, plus any interest you’ve accrued on the new purchase balance.
You may not get a grace period
But why would you have interest on your account if you made a purchase with a 0% APR credit card?
While a lot of consumers don’t realize this, carrying a balance on your credit card means forgoing your grace period — the amount of time you have to pay your credit card in full without paying interest. Grace periods must be at least 21 days by law, so you have at least 21 days to avoid all interest charges on regular purchases provided you don’t carry a balance.
When you transfer a balance to a new credit card, however, you are carrying a balance. That means forgoing your grace period altogether on new purchases. You’ll start accruing interest on purchases you make with your balance transfer card from the moment you make them. (See also: Everything You Didn’t Understand About Credit Card Interest, Grace Periods, and Penalty APRs)
The right way to use a balance transfer credit card
The bottom line: Using a balance transfer credit card for purchases can be a risky endeavor. Generally speaking, it means racking up interest without a grace period. And obviously, things could easily get worse in a hurry if you can’t pay your minimum payment plus your entire purchase balance off right away.
That’s why you’re better off not using a balance transfer card for purchases. Transfer your balance to the 0% APR card, then focus on paying off debt instead of charging up a bigger balance. Or, at the very least, make sure you get a 0% APR credit card that offers zero interest on both balance transfers and purchases. Cards like this do exist, so if you really need to, make sure you’re applying for one of those. (See also: Best Credit Cards with 0% APR for Purchases)