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I was reading up on What is the difference between "good debt" vs. "bad debt"? and it says borrowing money from a credit card is a bad-debt.

So, I was wondering if the credit card company gives you interest-free card for an year, Is it OK to take that card and use it to pay other loans which have higher interest rate? Because, a lot of people I know do that, get another credit card to pay some other loans/cards.

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    For the average cc user, this tactic is a slippery slope based on a lack of understanding. I recommend against it per Keith and Dilip's responses below. – gef05 Apr 24 '12 at 21:45
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    Your overall debt needs to go down during this time. Your overall interest paid has to go down. It is really where your heart and intention on getting debt free is. I used this method to get out of debt, but my wife and I had a clear plan on how we were going to leverage the interest savings to pay off more debt quickly. – Sun Sep 5 '13 at 1:51
  • This was a tactic that regularly -- and quite successfully -- used when clawing out of debt, since 3% (you must add in the transfer fee!) is a hell of a lot less than 25%. Obviously, though, you must have discipline in your spending habits while doing this: debit cards FTW! – RonJohn Jul 1 '17 at 4:16
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Many people who do transfer a balance from one credit card to another have no clue as to what is going on and how credit cards work.

  • If you transfer a balance from one credit card to another, you are charged a fee of anywhere from 3% upwards (subject to a minimum of $10 or so) up front. If Credit Card A has balance $1000 and you transfer it to Credit Card B which is offering no interest for a year on the transferred balance, you owe Credit Card B $1050 (say). In most cases, that $50 has to be paid off as part of the following month's bill.

  • If you are carrying a revolving balance on Credit Card B, that $50 will typically be charged interest from the day of the transfer.

  • Your monthly bill will not (necessarily) include that $1000 you owe for one year or six months or whatever the transfer agreement you accepted says. If you tend to pay anything less (even a penny) than full payment of each month's bill on Credit Card B, your partial payment will be applied to that $1000 first, and anything left over will be applied to the monthly balance. In short, if you don't pay in full each month, that $1000 will not be "yours" for a year; you may end up paying $50 interest for borrowing $1000 for just one or two months, and the rest of your balance is the gift that keeps on giving as the credit card company likes to say. UPDATE: This has changed slightly in the United States. Any amount paid over the minimum amount due is charged to the higher-interest balances. So in this case, if you had $1000 at a 0% promotional rate and a regular balance of $500, and the minimum payment was $100, and you paid $150, $100 would pay down the promotional balance, and the extra $50 would pay down the regular balance.

About the only way to make the deal work in your favor is to

  • Transfer money only if you have paid the full amount due on the last two statements before the date of the transfer and are not carrying a revolving balance. Check your monthly statements to make sure they show Finance Charge of 0.00. Many people have never seen such a sight and are unaware that this can be observed in nature.

  • Make sure that you pay each month's bill in full (not the minimum monthly payment due) each month for a whole year after that.

  • Make sure that the bill containing that $1000 (coming out a year after the transfer date) is also paid in full.

Very many credit-card users do not have the financial discipline to go through with this program. That is why credit card companies love to push transfer balances on consumers: the whole thing is a cash cow for them where they in effect get to charge usurious rates of interest without running afoul of the law. $50 interest for a one-year loan of $1000 is pretty high at current rates; $50 interest for a two or three month loan where the customer does not even notice the screwing he is getting is called laughing all the way to the bank.

See also the answers to this question

  • You sure the fee (the $50 in this example) accrues interest while the $1000 doesn't? That's not been my observation. – JTP - Apologise to Monica Apr 25 '12 at 2:14
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    The balance transfer fee can be as low as 0% as offered by a few of the cards I carry. The bank knows that most can't or won't pay in full by the balance promo expiry date, as you stated in your answer. – Frazell Thomas Apr 25 '12 at 5:08
  • @JoeTaxpayer I believe the fee accrues interest if there is a revolving balance when the transfer occurs (the fee is technically not part of the amount transferred over), but it might depend on the actual agreement "click to accept" which most people do without detailed reading. Since you are known as a financially savvy person, maybe you got offered better deals than the common man gets :-) – Dilip Sarwate Apr 25 '12 at 8:52
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    @FrazellThomas You are correct, but the balance transfer fee offer depends on the perceived habits of the prospective customer. All three of my credit cards (aged 3, 10, and 17 years), all paid on time and in full each month, are offering me 5% transfer fees, even though their advertisements do tout 0% transfer fees as being available. My card companies know they will be making me an interest-free loan if they don't charge a transfer fee, and so I don't "qualify" for the 0% transfer fee offer (fine print says for qualifying customers only)! Bait and switch is alive and well in these matters. – Dilip Sarwate Apr 25 '12 at 10:53
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    Thanks, Dilip. I've pulled this stunt twice. Both times it was with a brand new card that sent the offer with the card. One had no fee at all, the other was a percentage, but with a $50 dollar cap, so the $20K cost a fraction of a percent, and was sent right to a 5% mortgage. Just as the deal ended, the mortgage was refinanced to 3.5%. The free deal saved me $950 over a year's time. – JTP - Apologise to Monica Apr 25 '12 at 15:49
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I am sure everyone is different, but it has helped me a great deal.

I have had several card balances go up and the interest on those per month was more than $200 in just interest combined. I transferred the balances over to 0% for 15 months – with a fee, so the upfront cost was about $300.

However, over the next 15 months at 0% I'm saving over $200 each month. Now I have the money to pay everything off at 14 months. I will not be paying any interest after that, and I cut up all of my cards so I won't rack up the bills with interest on them anymore.

Now, if I can't buy it with a debit card or cash, I don't get it. My cards went up so high after remodeling a home so they were justified. It wasn't because I didn't pay attention to what I could afford. My brother, on the other hand, has trouble using credit cards properly and this doesn't work for him.

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The short answer is no, it's probably not ok.

The longer answer is, it might be, if you are very disciplined. You need to make sure that you have enough money to pay off the card after a year, and that you pay the card on time, every month, without exception. There may also be balance transfer or other fees that only make it worth while if the interest rate or balance on the other loan is high.

The problem is most of these offers will raise your rates to very high levels (think 20% or more) if you are even one day late with one payment. Some of them also will back charge you interest starting from day one, although I have only seen this on store credit "one year, same as cash" type offers.

In the end you need to balance the possible payoff against how much it will cost you if you do it wrong. Remember, the banks are not in the business of lending out free money. They wouldn't do this unless enough people didn't pay it back in one year for them to make a profit.

  • Good answer. To this I'd like to add the following. Yes, it's ok if you are disciplined. And by disciplined, I mean, setup an automated payment a good while before the due date, so that you can catch any errors (which will happen). In my case, I did this for several years, but when it went wrong, it REALLY went wrong. – NeedAdvice May 23 '12 at 20:48
  • It is acceptable for someone who truly understands what they are doing and are sufficiently disciplined to keep on top of all the details. Such a person almost certainly knows enough about what they are doing that they aren't going to be asking a question like this. – Loren Pechtel Sep 6 '13 at 3:15
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The short answer is: it depends.

The longer answer is that balance transfers are tricky, and often a bait-and-switch; they'll offer 0% interest, but charge a 3-4% "fee" (which isn't interest and is perfectly legal) on the amount transferred. If you transfer $5000, you now owe the new card company $5,200. Now, that could be fine with you; at an 18-20% APR on your old card you may have been charged that much in just one or two months, and by capitalizing this fee up front you lock in 0% for a year.

However, there are other possible machinations behind the scenes. For instance, you may incur retroactive interest on the full balance if not paid off in the year (at 20% APR on $5000, that's an extra grand you will owe if there's even one dollar of the original transferred balance left in the account). Paying off the balance and thus avoiding these penalties has actually been made harder by the CARD Act, which required creditors to apply any payment made to the highest-interest portion of the balance first. As balance transfers are 0% they are the last on the list, so if you transfer a balance and then carry an additional balance you are setting yourself up for failure. You MUST have a zero-dollar balance for one month sometime during the year in order to be sure the balance transfer is paid off and no penalties will be incurred.

That can be hard, because 5 grand is a lot to pay off. To pay off a $5000 balance in 12 months requires payments of $417. Miss one and you'll have to make it up over the remaining months. If you transferred a balance, you probably didn't have $420/mo to pay to the card in the first place.

In summary, balance transfers can work, but you have to understand all of the terms and conditions, and what will happen should you violate any of them. If you don't understand what you're getting into, you could very well end up worse than you started.

  • Minor correction to KeithS's response. When a credit card has parts of the balance being charged different interest rates, the full amount of the Minimum Payment is applied to the lowest-interest-rate amount. Anything over that minimum payment is applied to the highest-interest-rate amount. – DukeBrymin Apr 26 '12 at 17:57
  • Minor addendum to DukeBrymin's comment: the rule stated has been applied to US credit cards since the CARD Act of 2009. Credit cards issued in other countries might well have different rules. Prior to the Act, US credit card companies were free to apply the amounts less than full payment due in the manner most advantageous to them, which usually meant in increasing order of interest rates. – Dilip Sarwate Apr 27 '12 at 10:55
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Here's the issue as I see it. The fact that one has high interest debt says a lot about the potential borrower. Odds are very good that person will not pay the zero card off before the rate expires, and will likely charge more along the way.

I'd love to be able to say "great idea, borrowing at a low rate to pay off a high rate card will be the first step to getting you all paid off" but chances are in a year's time you will not be better off.

You said you know a lot of people that have done this. Have they all been successful? It's possible, but I'd heed the warnings of those here and first think how you got into the credit card debt.

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I've done exactly what you are describing and it was a great move for me. A few years back I had two credit cards. One had a $6000 balance and a fairly high interest rate that I was making steady payments to (including interest). The other was actually tied to a HELOC (home equity line of credit) whose interest rate was fixed to "prime", which was very low at the time, I think my effective rate on the card was around 3%.

So, I pulled out one of the "cash advance checks" from the HELOC account and paid off the $6000 balance. Then I started making my monthly payments against the balance on the HELOC, and paid it off a bit more quickly and with less overall money spent because I was paying way less interest.

Another, similar, tactic is to find a card that doesn't charge fees for balance transfers and that has a 0% interest rate for the first 12 months on transferred balances. I am pretty sure they are out there. Open an account on that card, transfer the balance to it, and pay it down within 12 months. And, try not to use the card for anything else if you can help it.

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"good" vs "bad" debt in the context of that post.

At least in the UK this can be a good tactic to reduce the cost of credit card debt. Some things to consider

  1. Many cards have balance transfer fees. You need to factor these in to your overall cost comparisons.
  2. You need to be disciplined, if you miss any payments the rate shoots up. If you carry a balance for longer than the free period the rate shoots up.
  3. It's usually a fairly short term solution. There is the possibility of transferring the balance again but that requires keeping up your credit rating.

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