When to Use a Balance Transfer Credit Card
Money Girl explains the right way to use a balance transfer credit card to save interest and pay off your debt faster – so you can live a richer life.
Laura Adams, MBA
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When to Use a Balance Transfer Credit Card
If you’re feeling overwhelmed byyour debt—or you have it under control, but just want to get rid of it faster—there are some smart strategies to consider. However, if you’re not careful, some can backfire and actually hurt your finances instead of helping you get ahead.
In this episode, I’ll cover one type of debt management strategy, which is using balance transfer credit cards. You’ll understand the right way to use them you so you can cut your interest expense, save money, and get out of debt faster.
Resource: To learn smart strategies to manage and get out of debt fast, check out DominateYourDebt.com.
What Is a Balance Transfer Credit Card?
A balance transfer credit card is a special type of card that offers low or 0% interest for a certain amount of time, which is known as the promotional period. Promotions vary depending on the card, but are generally in the range of 6 to 24 months.
The longer the promotion, the better. Until it expires, you can keep a balance on the card without having to pay one penny of interest on 0% offers.
Let’s say you’re carrying a $5,000 balance on an expensive credit card that charges 22% interest. If you move it to a transfer card that charges 0% for the first 12 months, you’ll save about $875 during the promotional period. But after the promotion is up, a higher interest rate goes into effect for any remaining balance.
When you’re approved for a balance transfer credit card, you’re given a credit limit, just like with other types of cards. You can set up a transfer using your card’s online account, or using paper convenience checks, in an amount up to your available credit limit. The transfer card sends money to the account you want to pay down, and then moves the balance to your new card.
Transfer cards aren’t just for paying off credit cards: you can also use them to pay off other types of debt, such as car loans, personal loans, and retail accounts. Many come with a deadline, such as 30 or 60 days, for new customers to complete a balance transfer. So be ready to make the move as soon as you’re approved, so you don’t miss the savings opportunity.
The downside of these cards is that every time you transfer a balance, you’re typically charged a transfer fee in the range of 3% to 5%. For instance, a card with a 3% fee means that you’d owe $150 for a $5,000 transfer. That would increase your debt from $5,000 to $5,150. However, some cards have no transfer fees, which is a terrific offer to take advantage of when you see it!
See also: Consolidate Credit Card Debt and Save Money
The Best Way to Use a Balance Transfer Credit Card
The best way to use a balance transfer card is to have a solid plan to pay off your balance before the promotional rate expires.
Here’s an example of a situation when doing a balance transfer makes sense: Let’s say you’re having a good year at work and are going to get a $5,000 bonus within six months. You plan to use the bonus to wipe out your $4,000 credit card debt, but nstead of waiting for the bonus to arrive, you pay off the credit card debt with a transfer card that charges 0% interest for six months.
If your minimum payment on the old credit card was $120, now you can save that amount each month instead – so over six months, you could save a total of $720. Once you receive your bonus, you would pay off the transfer card in full, before the 0% interest offer expires.
See Also: Can a Balance Transfer Hurt Your Credit Score?
If you’re not positive that you can pay off the full amount in time, don’t risk doing a balance transfer – when the promotional period ends, you might get stuck with a higher interest rate than you started with.
But if you’re not positive that you can pay off the full amount in time, don’t risk doing a balance transfer. When the music stops playing and the promotional period ends, you might get stuck with a higher interest rate than you started with. That’s why it’s important to know what the card’s regular interest rate will be after the promotion.
Another tip for using a transfer card wisely is to avoid making new purchases while you have a transfer balance. One reason is because cards typically only offer the low or 0% rate for your transfers, not for your new purchases.
Additionally, if you have both a 0% balance and a higher rate new purchase balance on the same card, you can’t tell the issuer how to apply your payments. Most card companies will apply your minimum payment to the lower interest debt first. That’s in the card company’s best interest, but not in yours.
Having more money applied to a 0% balance, instead of a higher rate balance, means it’ll take you longer to pay off the more expensive debt. Therefore, to avoid this issue, don’t use a balance transfer card for new purchases until you pay off your promotional balance in full.
See also: Pay Lower Interest Rates on Debt and Save Money
How to Choose the Best Balance Transfer Credit Card
When choosing a balance transfer card, look for one with the lowest transfer fee and the lowest promotional rate that lasts the longest period of time. And if you plan to use the card after the promotional period ends, also look for one with no annual fee and a low regular interest rate.
Also, before you pull the trigger on doing a balance transfer, make sure that you understand all the card terms. Be extremely cautious; there are severe penaltiesburied in the fine print that can sneak up on you.
For example, one late payment on most balance transfer cards results in a rate hike into the stratosphere. Many default rates can approach 30%! You can also lose your promotional interest rate if you exceed your card’s credit limit or have a payment returned due to insufficient funds in your bank account.
Shifting debt to a credit card with low or 0% interest obviously doesn’t make the balance go away, but it can make the debt much less expensive for a limited period of time.
If you can save money during the promotional period despite any transfer fees, you’ll come out ahead. And if you plow your savings back into your debt, instead of spending it, you can pay off your debt even faster.
Make it a goal to use credit cards for convenience, rewards, and as a way to build great credit, not to carry balances from month to month. When you pay off your balance every month, you get the best out of your credit cards – instead of them getting the best of you.
For more smart strategies to tackle your debt and meet your financial problems head on, visit DominateYourDebt.com.
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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.