The most dangerous game you can play with credit cards: The Balance Transfer Game.
Whenever I talk about credit cards, there are three major reactions:
- Credit cards are terrible; you probably have a ton of debt
- Credit cards are great; I'm already optimizing my spend and getting tons of value
- The Balance Transfer Game
What is a balance transfer?
A balance transfer is when you apply for a new credit card with 0% interest for a year, and transfer your credit card balances to the new card.
People tend to spend money like they have the assets to pay it off at the end of the promotion period, but they usually end up applying for another 0% interest card and transferring the balance again. The second card might have a larger credit limit to pay off the first card.
Why are balance transfers dangerous?
The reason why balance transfers are dangerous is that people end up racking up more debt over time without realizing how much they owe. A few of my friends have fallen into this trap and accumulated $50,000 in debt after banks stopped issuing 0% interest cards to them.
I'm not a fan of playing this game, especially if you're not buying necessitates. More likely than not, you're buying things you want, and not things that you need. Some people accumulate more debt to buy a bigger TV or a new purse.
The biggest mistake people make is considering a 0% interest loan "free money." It's not. You still have to pay the balance because it's a loan. People also often forget that some cards have a 3% balance transfer fee, so you're paying 3% on top of what you owe.
Even if you find a card that doesn't have a balance transfer fee, I still wouldn't recommend using it. The few situations where balance transfers could be an option are:
- You have a life emergency and need access to cash
- If you have debt that you want to refinance
- Taking out the loan now will lead to more money in a short time span. For example, if you're a photographer and you need equipment for a project that will pay you to cover the cost of the equipment, plus more.