0% Balance Transfers: Who Really Benefits

A credit card balance transfer offer with a 0% annual percentage rate (APR) seems like a great deal: You get to pay no interest on money you owe for 12 to 18 months. These offers can, in fact, be money-saving tools if you use them wisely. Thinking about what’s in it for the bank and credit card company before you sign up, however, can help you avoid making costly mistakes. Here's what you need to understand.

Credit card companies have several money-making reasons for offering to let customers transfer a balance from a competitor’s card and pay 0% interest on that balance for a year or longer. “Credit card companies offer 0% financing as a way to entice you to apply for their credit card,” says certified financial planner Colin Drake of Marin Financial Advisors in Sausalito, Calif. Then they make money from the 3% interchange fees  retailers pay on every purchase a consumer charges to a credit card, from balance transfer fees and from customers who don’t pay off the balance before the introductory period ends. 

“In most businesses the cost of acquiring a new customer is high. Credit card companies are willing to pay that cost through advertising their 0% cards and then allowing you the free use of credit for a limited time period. They’ve done all the research they need to realize that this will be money well spent and will lead to a very profitable customer for them,” says Drake.

While the balance you carry under a 0% balance transfer offer won’t accrue interest during the interest-free period as long as you make every minimum payment on time, credit card companies usually charge consumers a fee for moving the balance from the old card to the new, 0% introductory offer card. A 2018 CompareCards study showed that the average balance transfer fee is 3.46%, so for every $1,000 you transfer, you’ll pay $34.60 in balance transfer fees. If the credit card has an annual fee, that’s another opportunity for the card issuer to make money when you transfer your balance to a new card.

When you transfer a balance to get a 0% introductory rate for 12 months, you can’t just forget about the balance and let it sit there for a year. You have to make minimum payments before the due date every month. If you don’t, you’ll lose the 0% rate and might also have to pay a late fee for your missed payment. When you lose the 0% rate, you’ll start paying interest on your transferred balance at the penalty rate unless you have a card with no penalty APR.

Consider scheduling automatic minimum monthly payments, so you’ll never be late because of forgetfulness. Even with automatic payments in place, you should still set a calendar reminder to make sure each payment goes through before the due date. You’ll also have to stay on top of your checking account balance to make sure there’s always enough money to cover the automatic payment.

Once a bank has you as a credit card customer, it might be able to get your business in other ways. You might open a personal checking account for which you pay a monthly fee. You might move your savings to that bank, where it earns little interest for you as the bank lends it out at a higher rate. You might take out an auto loan when you need a new car and pay 6% interest on it for five years. You might even take out a mortgage through that bank and send it interest payments for the next 30 years. Then, when you want to remodel your bathroom, you might take out a home-equity line of credit with that bank. Later you might open another credit card and rack up a balance on which you have to pay interest.

There’s nothing inherently wrong with any of these products – or the fact that banks make money from them – but any time a bank signs you up for one of its products, it has the opportunity to create a relationship with you. Hope of that additional business is another reason for credit card offers.

“Revolvers,” in credit-card industry lingo, are consumers who carry a balance on their credit cards from month to month. They accrue interest on their balances, which adds to banks’ bottom lines. “Transactors” are far less profitable, because they simply use their credit cards as convenient tools for making purchases and possibly earning rewards. Transactors pay off their balances in full and on time every month. The only money creditors earn from these consumers comes from interchange fees. Transactors get a free ride from the card’s interest-free grace period. Some even make money from credit-card sign-up bonuses. 

“Banks covet cardholders who revolve balances while paying their minimum payment on time,” says Kevin Haney, who spent more than a decade as a sales director at Experian, one of the big three credit bureaus. He now shares his insights as a credit bureau insider at the website Growing Family Benefits. “Revolvers are far more profitable than transactors,” he says. “The [zero percent balance transfer] offers represent the most cost-effective way to increase revolving balances that generate interest revenues. Other marketing methods attract transactors in addition to revolvers.”

Everyone goes into a 0% balance transfer offer expecting to come out ahead, but will they? “Banks track and measure results of these offers and know from experience the percentage of people who will win or lose the game,” Haney says. “Winners take the offer and repay the balance in full before the introductory period expires, or they take advantage of another 0% offer and transfer the balance to another bank. Losers pay the transfer fee and then resume paying interest on the balance after the introductory period expires.”

Banks count on you overestimating your strengths and underestimating your weaknesses; it’s called “superiority bias.” Most people accepting the offers see themselves as winners in the game, but statistics drawn from years of tracking these offers show that the majority ends up as losers, says Haney.

If you want to come out ahead from transferring a high-interest balance to a card that offers a temporary 0% rate, understand that the credit card companies aren’t rooting for you to succeed. Read and understand the balance transfer offer’s fine print. It’s also a good idea to comb through the credit card issuer’s website for additional information on how it handles balance transfers.

If understanding these offers doesn’t come easily to you – or if you haven’t overhauled the spending behaviors that got you into debt in the first place – you might be more likely to come out ahead by focusing on paying down your existing balances rapidly instead of shuffling money around in an attempt to save a few hundred bucks.