Grace Chang graduated from college debt-free. It wasn’t until she began working full time that she started using credit cards, and eventually ran up a balance of $4,000.
At first, monthly expenses like gas and groceries were easy to pay off in full. But after a few unexpected medical expenses and car repairs, it became harder to put a dent in the balance. “I also love traveling, and have been traveling a lot in the past year with my boyfriend, so that doesn't help,” says Chang.
Despite making changes like bringing her lunch to work, the debt hit its peak last month when she made the decision to get braces, something she had been considering for years. The expense doubled her balance to $8,000. With an interest rate of 19 percent, it was more than the 26-year-old could manage.
After months of ignoring advertisements to transfer her balance to an interest-free credit card, it seemed like the right time to apply. “I didn't think I would need it, but now I have a much bigger balance while facing high interest charges,” she says.
In early November, Chang transferred $3,000 to the Citi Dividend Platinum Select Visa Card, which will remain interest-free until May 2017. If the balance isn’t paid off by then, the interest rate will jump to a staggering 20.99 percent, well above the current average rate of 15 percent.
Although millennials are commonly seen as plagued with student loans, credit card balances are the most common type of debt for the generation. Some 38 percent of 19- to 34-year-olds carry a balance on their credit cards, compared to 36 percent who have student loans, according to a recent survey from Experian.
For those looking to get out of debt, zero-percent balance transfer cards can save hundreds or even thousands of dollars in interest. But the cards often have hidden fees and steep penalties that can leave a cash-strapped borrower more indebted over time.
"There are enough details and enough deadlines that people are going to miss that some people will end up paying more for these cards than they might expect," says Matt Schulz, CreditCards.com's senior industry analyst.
Steve Repak, author of “6 Week Money Challenge: For Your Personal Finances” and a certified financial planner, recommends asking for a lower interest rate from the bank before applying for a new card. “They might choose to reduce it because they don’t want to lose your business,” he says.
Chang tried this first, but her card issuer said her length of credit history was too short to qualify. Still, it’s worth a try. About two-thirds of people who ask their current card issuer for a reduced rate receive it, according to CreditCards.com. If that doesn’t work, ask these five questions to determine if an interest-free balance transfer is a good idea.
1. What's your credit score?
To grant approval for a balance transfer card, most banks require a credit score above 750, which is considered excellent credit. “This can be tricky for millennials who may not have established credit histories yet. It can take five years or more of positive credit history to become an attractive applicant for many banks,” says David Weliver, founding editor of Money Under 30.
Opening a balance transfer card and closing old credit cards can result in a lower credit score going forward. “Which means in the future if you need to get a mortgage or an auto loan, it could cost you more in the long run,” Repak says.
2. How much of your available credit are you using?
Having a good credit score may not be enough to get approved if other cards are maxed out. “That seems counterintuitive, because it’s consumers with debt who would want to transfer a balance,” says Weliver. But banks are wary of lending to someone who may not be able to keep up with the payments.
“If you’ve already used more than 50 percent of the available credit on all of your credit cards, that could be a red flag when you apply for new ones,” he adds.
3. How long does the introductory rate last?
The initial zero-percent interest rate typically lasts 12 months. “Check to see what the rate goes up to after the teaser rate expires,” advises Repak. For balance transfer cards, the average rate after the interest-free period is 17.83 percent, but it can be as high as 29.99 percent.
“Keep in mind that the balance you transfer may be at zero percent, but any of your new purchases may not be,” he adds. Read the fine print to determine the interest rate for new purchases, and steer clear if it’s too high.
4. Is there a deadline for making the balance transfer?
To qualify for the zero-percent introductory rate, more than half of balance transfer cards require the transfer be processed within a certain time frame, such as 60 days, according to CreditCards.com. For transfers completed outside of that time frame, the interest-free offer will no longer apply.
“When you first hear 60 days it sounds like a long time. In reality we’re all busy, we’ve got to-do lists that are a mile long. It’s not hard to forget about something,” says Schulz. “If you miss the deadline, you miss your chance to save.”
5. Will you have to pay a transfer fee?
Banks are in the business of making money, so most credit cards will charge a fee for executing the balance transfer. The most common fee is 3 percent of the total amount or $5 to $10, whichever is greater.
“A few of the cards will waive that fee entirely or for a short period of time for new cardholders,” says Schulz.
When Chang initiated her balance transfer this month, she paid $30, or 1 percent of the amount transferred. She says she plans to put $150 to $200 toward her balance each month so she pays off her new card before the interest-free period ends. With the money she saves in interest, Chang says she hopes to start building an emergency fund.
Repak says that’s a wise move. “If you have no savings, you have a high probability of getting into debt. The cure for millennials not to get into debt is to build up their savings.”