Zero-interest credit card offers aren’t a free ride

Now is not a good time to be running up the balance on your credit card.

Interest rates are climbing. The average rate for a new card is more than 20%, based on a review by LendingTree of about 200 card offers from banks and credit unions. For the past several years, card rates for those carrying balances had hovered around 16%.

Across all income groups, more borrowers are worried that they won’t be able to pay their credit-card balances in full, according to a recent LendingTree survey. The drop in confidence comes as rising prices spur US consumers to rely more heavily on plastic, piling up credit-card debt.

Card companies know you hate paying interest, so to convince you to take out a new card, they’ll offer to let you transfer your balance from a competitor’s card and pay zero interest – for a little while, at least. After a year or so, interest kicks in at say, 20%, or even higher.

Still, the idea of getting 0% interest on your credit-card balance for even a short time is super tempting. A study from NerdWallet found that 11% of respondents had applied for a balance-transfer offer – and that was in April before the Federal Reserve began really hiking rates. Millennials were the demographic most likely to do so.

And while lenders are starting to be a bit more cautious, they’re still comfortable extending balance-transfer offers to people with middle-of-the-road credit scores. A score of about 670 is all you need, says Ted Rossman, senior industry analyst at Bankrate.com. (The average credit score is around 710 these days.)

If you qualify, there’s plenty of reason to proceed cautiously. These offers won’t necessarily save you all that much money. If you have substantial credit-card debt but excellent credit, you may be better off getting a personal loan. Or if you have relatively poor credit, working with a nonprofit credit counselor may provide you with more options.

First, there are fees. Transferring a balance to a new card typically means a charge of anywhere from 3% to 5% of the total balance. So when you’re calculating how much you’ll be saving in interest with the 0% offer, be sure to factor in what you’ll be paying in that upfront fee. And if a card issuer says there’s no balance-transfer fee, it probably means they won’t be as generous with the zero-interest time period.

Plus, as interest rates move higher and delinquencies increase, card issuers are likely to make their balance-transfer offers less attractive, charging even higher fees for less time at 0%.

These balance-transfer offers also come with limits. You often won’t know how much of your balance you can shift over until after completing the application and getting approval. The average credit line for new accounts, including balance-transfer ones, is about $9,000 for someone with excellent credit, $4,900 for very good credit and $2,300 for subprime credit ratings.

For those with balances, the mean debt amount is about $6,300. So be prepared to be approved (usually based on a proprietary formula that takes into account your credit score and income, among other things) for a transfer that may be less than the amount you wanted to move. Rossman says that while card issuers may still be pretty flexible on creditworthiness, they’re being a lot stingier when it comes to credit limits.

Also, be aware that you typically have a defined window of time to make the transfer, and you’re generally prohibited from making a transfer to a different card with the same issuer.

The biggest risk, though, is your best intentions. While you may resolve to make payments diligently every month to chip away at the balance so that you can pay it off before the 0% offer expires, it’s not always so easy. About half of Citigroup’s balance transfers ultimately convert to revolving balances after the promotional period, the bank disclosed during an earnings call last year.

What’s more, you won’t necessarily know exactly what the rate will be after the 0% ends. The card issuer will give you a range, but it can fluctuate, and the onus is on you to inquire.

So for the most disciplined among us with excellent credit and a big credit balance that would be nice to pay off interest-free, a balance-transfer card can be worthwhile. But a personal loan might be even better. Such loans can help to streamline debt into one, fixed payment. You’ll pay more than 0% interest, of course, and there may be fees, but you’ll lock in a rate of, say 6%, for longer, such as up to five years.

If your credit has suffered, a nonprofit credit counselor can work with you to negotiate fees and interest with your card company, and create a repayment plan.

For that matter, before you consider a balance-transfer card, why not just pick up the phone and talk with your current card issuer? The company may be motivated to work with you because it doesn’t want to lose your business to a competitor’s balance-transfer offer.

According to LendingTree, 70% of those who asked to lower their interest rate in the past year got at least some reduction – and the average decrease was 7 percentage points. Those numbers have stayed pretty consistent through the years, says Matt Schulz, chief credit analyst at LendingTree, and he doesn’t expect it to change anytime soon.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Alexis Leondis is a Bloomberg Opinion columnist covering personal finance.

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