How to Save Money Using a Balance Transfer Credit Card
Not sure if a balance transfer credit card offer is right for you? Laura explains what a transfer card is, the pros and cons, and when it can help you save money. You’ll learn smart tips to cut your interest expense and get out of debt faster.
If you’ve ever received a balance transfer credit card offer through the mail or online, you may have wondered if it could help or hurt your finances. These promotional offers can be an easy way to save money. However, if you don’t use them wisely or understand the fine print, they can cost you.
In this post, I’ll explain what a balance transfer credit card is, the pros and cons, and when it can help you save money. You’ll learn smart tips to cut your interest expense and get out of debt faster.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is just like a regular credit card, except that it includes an incentive to transfer balances from other accounts. You pay an annual percentage rate (APR) of 0% during a promotional period that’s typically in the range of six to 18 months. In general, you’ll need good credit to qualify for the best transfer deals.
Every transfer offer is different depending on the issuer and your financial situation, but the longer the promotional period the better. You don’t accrue one penny of interest until the promotion expires.
However, you typically must pay a one-time balance transfer fee in the range of 2% to 5%. For example, if you transfer $1,000 to a card with a 3% transfer fee, you’ll be charged $30, which increases your debt to $1,030. So, choose a transfer card with the lowest transfer fee and no annual fee, when possible.
When you’re approved for a transfer card, you’re given a credit limit, just as with other types of credit cards. You can pay off just about any debt—such as a balance on a different credit card, an auto loan, or a personal loan—in an amount up to your credit limit on the transfer card.
Once approved, most issuers provide paper convenience checks or give you the option to have funds deposited into your bank account, so you can pay one or more of your creditors. Or they may require that you complete an online form indicating who to pay, the account number, and the amount, and then send funds to creditors on your behalf.
Once the transfer is complete, the debt balance moves over to your transfer card account and any transfer fee is added. But even though no interest is added to your account, you must still make monthly minimum payments throughout the promotional period.
Missing a payment means your sweet 0% APR could be ripped out from under you and replaced with a default rate as high as 30%! That could easily wipe out any benefits you hoped to get by doing a balance transfer in the first place.
When You Should Use a Balance Transfer Credit Card
I’ve used several balance transfer offers and they can be an easy way to save money when used the right way. Doing a transfer is a good strategy if, and only if, you know for sure that you can pay off the balance before the offer’s expiration date.
The Debt.com 2018 Credit Card Survey found that 68% of respondents used a 0% balance transfer offer and paid off their balances in time, but 32% didn’t. Carrying a balance after the promotion means that your interest rate goes back up to the standard rate, which could be much higher than what you paid before the transfer.
Here are some examples for when doing a transfer is a good idea. Let’s say you’re having a good year at work and are going to receive a $5,000 bonus within six months. You plan to use the bonus to wipe out your $4,000 credit card debt.
Instead of waiting for the bonus, you can pay off the balance with a no-interest transfer card. When you receive your bonus you’d pay off the transfer card in full, before the promotion expires. You’d pay no interest and save money during the promotional period.
Another example is if you bought a car when you had bad credit and got a high, 17% APR. If your credit is better now, you could apply for a balance transfer card and save.
Let’s say your monthly auto payment is $500 and you have about $8,000 left to pay off over the next 18 months. If you transfer your loan balance to a card that offers 0% interest for 18 months with a 3% transfer fee, you’ll come out ahead.
Simply divide your debt balance, plus any transfer fee, by the number of months in the promotion. That shows you how much to pay each month to wipe out the balance in time.
For this example, your balance plus the 3% fee would be $8,240 ($8,000 x .03 = $240). Dividing $8,240 by 18 months gives you a $460 monthly payment.
If you pay $460 a month to the card during the 18-month promotional period, you’d keep the car’s original payoff schedule and save more than $1,000 in interest! To figure a loan’s interest expense it’s easy to use the Loan Amortization Schedule template in Excel.
The bottom line is that you must have a solid exit strategy for paying off your balance before the promotional rate on a transfer card disappears.
How Using a Balance Transfer Credit Card Affects Your Credit
A common question about using a balance transfer card is how it affects your credit. A top factor in your credit scores is how much debt you owe on revolving accounts (such as credit cards and lines of credit) compared to your available credit, known as your credit utilization ratio.
For instance, if you have $2,000 in debt and $8,000 in available credit, you’re using one-quarter of your limit and have a 25% credit utilization ratio. It’s calculated for each of your revolving accounts and as a total on all of them.
I recommend using no more than 20% of your available credit in order to build or maintain optimal credit scores. Having a low utilization shows that you can use credit responsibly without maxing out your accounts.
Getting a new balance transfer credit card (or an additional limit on an existing card) instantly raises your available credit, which lowers your credit utilization and boosts your scores. Likewise, the opposite is true when you close a card.
In other words, closing a card after transferring the entire balance may seem like a good way to clean up your financial life; however, it comes with unintended consequences. One is that closing a credit card instantly shrinks your available credit, which spikes your utilization ratio and causes your scores to drop. So, instead of canceling a paid-off card, make a strategic decision to file it away or use it sparingly for purchases you pay off in full each month.
Another factor that plays a small role in your credit scores is the number of recent inquiries for new credit. So, applying for a transfer card typically causes a small, short-term dip in your credit. Having a temporary ding on your credit usually isn’t a problem, unless you have plans to finance a big purchase, such as a house or car, within the next six months.
So, remember that if you don’t close a credit card after transferring a balance to a new account, and you don’t apply for other new credit accounts around the same time, the net effect should raise your credit scores.
3 Pros of Using a Balance Transfer Credit Card
Here are three advantages of using a balance transfer credit card:
- Reducing your interest expense. The purpose of transferring debt is to temporarily eliminate interest so you save money, even after paying a transfer fee. Shifting debt to a 0% card obviously doesn’t make a debt balance go away, but it can make it less expensive for a limited period.
- Paying off debt faster. If you use savings from doing a balance transfer to pay down debt balances, you will eliminate them faster.
- Lowering your credit utilization ratio. As I previously mentioned, if you get a new balance transfer card, having more total available credit instantly lowers your credit utilization, and boosts your credit scores.
3 Cons of Using a Balance Transfer Credit Card
Here are three drawbacks to using a balance transfer credit card:
- Paying a transfer fee. As I covered, there’s usually a one-time fee for the amount transferred, in the range of 2% to 5%. For example, if you transfer $1,000 to a card with a 3% transfer fee, you’ll be charged $30, which increases your debt to $1,030.
- Paying higher interest after the promotion. If you’re not sure that you’ll be able to pay off a transfer card balance by the end of the promotional period, don’t use one. Your new standard rate varies by issuer and your financial situation but could spike dramatically.
- Giving up student loan benefits. It’s generally not a good idea to use a transfer card to pay off federal or private student loans. Problem is, you forfeit repayment or forgiveness options on federal student loans after the debt is transferred to a credit card.
Also, you give up the opportunity to claim a tax deduction on up to $2,500 in interest paid on federal or private student loans. You get this tax-break even if you don’t itemize deductions on your tax return. In contrast, interest paid on credit card debt is never deductible. Take a look at IRS Publication 970, Tax Benefits for Educationopens PDF file for more information.
Tips to Use a Balance Transfer Credit Card Wisely
Now that you understand how transfer cards work, here are more smart tips to make using them pay off:
- Transfer your highest-interest debts first. Getting rid of your most expensive balances first saves the most.
- Take advantage of no-fee transfer offers. Some cards don’t charge a fee if you complete a transfer during a limited period, such as within 60 days after opening a new account. If you don’t make the deadline you can still complete a transfer, but a fee would apply.
- Maintain good credit. The length of a 0% interest promotion and the available credit limit you receive depends largely on your credit. So building great credit will allow you to qualify for the best transfer offers.
- Don’t make new purchases on the card. A transfer card typically offers 0% interest only on transfers. So, depending on the card’s standard rate, it may not be a good option to use for new purchases.
- Have a payoff plan. As I’ve mentioned, the real trick to using a transfer card successfully is to have a realistic plan to pay off the balance before the promotional rate expires. Or be sure that the interest rate will be reasonable after the promotion ends.
If you can save money during the promotional period despite any balance transfer fees, you’ll come out ahead. And if you plow your savings back into your balance, instead of spending it, you’ll get out of debt faster than you ever thought possible.
For more smart strategies to get out of debt, check out Laura’s super affordable online course, Get Out of Debt Fast–A Proven Plan to Stay Debt-Free Forever.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
