Credit Card Balance Transfers Can Be Your Friend Comments42 Comments

In the past I’ve written about irresponsible credit card usage and how it benefits other cardholders. Used without proper care, a credit card can be quite dangerous.

I’ve also written about how personal loans aren’t always bad debt. Just because something can be used irresponsibly, it doesn’t mean that they should be avoided at all costs. Instead you should learn how to properly use it to your advantage.

So when other financial writers are proclaiming that credit cards are the spawn of Satan, I just don’t buy it. When they make such absurd claims, they are just letting people deny any responsibility for their mistakes with credit cards.

When we think of potential benefits of credit cards, the most obvious ones are the convenience and the rewards you can earn on purchases. The other big benefit that we should keep in mind is balance transfer options.

How Does a Credit Card Balance Transfer Work

When you first sign up for a new credit card, many cards these days have an offer to transfer a balance to your new credit card. You may ask: why would anyone want to transfer an existing debt to some high interest credit card?

The key is that they offer extremely low rates on these balance transfers. The best credit cards will offer you a 0% interest rate for up to 12-15 months. I’m sure a lot of you wouldn’t mind saving on interest for that period.

You simply get several checks that you can put towards whatever kind of debt you have. Then when you use any of those checks, the balance shows up on your credit card with their promotional interest rate.

With your existing credit cards you are often given similar offers that you can take advantage of at any time. The process works the exact same way.

So What’s The Catch?

Of course with credit cards, it isn’t all about saving consumers money. There is a catch that ensures the credit card companies make money off the deal. In this case there are actually a few catches.

The first catch is that instead of paying interest on the balance you are instead paying a balance transfer fee. This is normally calculated as a percentage of how much money you are transferring. Fortunately this fee is substantially lower than the interest you would have had to pay on your existing loan.

The bigger catch is that if that balance is still on your credit card once the promotional period expires, you will suddenly be paying high interest rates on that balance. Unless your previous debt was also on a credit card, that interest rate will be much higher than you were previously paying.

Also you have to be aware that you are usually required to still a pay a certain amount of that balance down each month. If you’re late on a payment, your balance transfer promotion is voided and you start getting charged higher interest. Really, you should keep making at least the full payments you were making previously. Suddenly paying only the bare minimum required by the credit card company could stall your debt payoff progress.

How Do We Use Credit Card Balance Transfers To Our Advantage?

The first step is to do the math to ensure that the balance transfer fee is indeed less than the interest rate you are currently being charged. In almost all cases it will be lower, but it is best to double check.

Next you should have a plan of how you will clear the balance before the promotional period expires. If the balance is low, you might be able to plan to pay it off completely in that time. Or you may need to arrange for somewhere else to transfer that balance once the promotion is over. That might be a line of credit with your bank or possibly a personal loan.

Some people even transfer it to another promotional offer with a different credit card, but you don’t want to get caught up signing up for many different credit cards. Getting too many credit cards can be a risky temptation for people and it also can be detrimental to your credit rating. I have heard of people transferring a balance from one credit card to another for years and saving huge amounts of interest, but that won’t work for everyone. I wouldn’t pursue that route unless I was absolutely certain it was the best route.

When you do take on a balance transfer offer, remember to mark off the promotion expiry date on your calendar or with some other reminder. That expiry date can sneak up on you and you might not remember until you see a big interest charge on your statement.

Personally I’ve used balance transfers to save on interest fees with both of my car loans. Once the balance was a low enough amount that I was comfortable transferring it to a credit card, I applied for the best balance transfer credit card I could qualify for. During the promotional period I paid off most of the balance and then moved the remaining balance over to my line of credit. I don’t know the exact amount I saved on interest each time I used this strategy, but I would definitely do it again the next time I need to take out a personal loan.

If you enjoyed this post, please consider subscribing to the RSS feed or you are welcome to leave a comment below.
By : Jeremy Biberdorf | 11 Dec 2012
Tweet this article :
Div line

42 thoughts on “Credit Card Balance Transfers Can Be Your Friend

  1. Cat

    I agree – I think they can be great (I wrote a similar post) as long as you keep an eye on the fine print and don’t run the new/transferred card up again!

    Reply
    1. Jeremy

      Good point about not running up the balance again. Sometimes when people finally clear off a debt they just fall back on their old habits and rack up new debt.

      Reply
  2. Jason @ WorkSaveLive

    Cat is right in that you simply must avoid running up your previous card (the one you transferred the balance from) and you must also focus on paying off the balance of the new card as quickly as possible. While the no interest might be nice for the specified time period, it won’t be much fun when the time runs out and you’re stuck paying 20%.

    Reply
    1. Jeremy

      For sure…it’s super important to either pay off that debt right away or have a plan of where to move that debt when the promotional period ends. If you have to pay 20% interest even for a month or two, that could eat up the potential savings.

      Reply
  3. John S @ Frugal Rules

    Good post Jeremy! I totally agree. Credit cards are simply another tool in an arsenal that can help you manage your finances and hopefully get a little something back from. It’s how people use them that tends to be the problem, not the cards themselves.

    Reply
    1. Jeremy

      I know I’ve gotten more benefits than drawbacks from credit cards. I’ve never carried a balance more than a month or two. Almost always it is paid off that month and I get to enjoy all the benefits for free.

      Reply
    1. Jeremy

      Awesome to hear that you used that strategy too. It can be quite beneficial if you are trying to pay off your debt quicker and want your payments going towards the balance and not towards interest charges.

      Reply
    1. Jeremy

      That’s a good point about finite goals. Normally you just have to make minimum payments, but when you know interest will increase at a certain date that can be excellent motivation to pay off the debt before then.

      Reply
  4. Edward Antrobus

    I never thought to do this when I ran up my credit card balance and now I don’t have the credit to qualify for a card with such promotions. But I guess that’s okay, because the last of my credit card debt is actually with a debt collector charging me 0% interest anyway. And most of my credit mistakes should be rolling off my credit report next year.

    Reply
    1. Jeremy

      You must be happy about your credit getting back to normal soon. Unfortunately this strategy doesn’t work for everyone since you do need good enough credit to qualify for the cards that have balance transfer offers.

      Reply
  5. Jacob @ iheartbudgets

    If you have truly commited to changing your behaviour that got you in credit card debt in the first place, this is a great option to relieve some of the damage being caused by high interest rates. If I were counseling someone in CC debt, I would get them started on a “get out of debt ASAP!” plan first, then introduce this concept to them.

    Reply
    1. Jeremy

      I definitely agree that the person also has to learn how to avoid debt in the first place. Sometimes it isn’t necessarily bad debt though. I don’t consider my car loans to be bad debt other than the fact that I overspent and got more car than I needed.

      Reply
  6. Veronica @ Pelican on Money

    My mom paid off all of her credit card debt playing the balance transfer game. I’m glad I never had to, but if anyone were in a similar situation I now have a piece of advice I can give them :)

    Reply
    1. Jeremy

      That’s cool that your mom used that strategy too. I have a friend with credit card debt and I’ll have to convince her to try this when her balance is lower.

      Reply
  7. Jacko

    Staying within your means = Freedom
    Borrowing from tomorrow = Slavery

    Using a credit card is about the worst thing that you can do. Transferring your balance to a new company is even worse. Now two sets of idiots can loose your personal information.

    Eventually you will come to realize that you can’t afford to repay the debt + interest + fees + BS and because it’s unsecured you can legally walk away or keep paying until you’re hundred and second birthday .

    You decide.

    Companies write off debt they can’t pay all the time why shouldn’t consumers?

    Reply
    1. Jeremy

      Well I would have to outright disagree with your views. Using a credit card doesn’t have to be about borrowing from tomorrow. I use my credit card for the majority of my purchases even though I have the cash in the bank. Then I get cash back rebates on all purchases and get all kinds of extra buyer protection. As for transferring a balance being bad, how is it bad to get 0% interest for up to 12-15 months? Do you really think credit card companies in this day and age have weak enough security to lose people’s information? I think your views on credit cards are a little off base.

      Reply
  8. Chris @ Stumble Forward

    One thing that can also be an issue is if someone would take the credit card they transferred the debt from and load it full of debt again. Now not only do you have one card full of debt but two full of debt. To do right takes someone with a lot of financial control to use them properly. Great article.

    Reply
    1. Jeremy

      That would sure be the worst case scenario. If you are the type to do that, you probably wouldn’t even get approved for that 2nd credit card. Well credit card companies do like big spenders provided they make payments. Before proceeding with this strategy you do have to get credit spending under control.

      Reply
  9. AverageJoe

    We had a fish tank full of cut up credit cards in my office when I was an advisor. After the balance transfer was finished, I’d make them call the company and cancel the card and then cut it up in front of me. That fish tank full of cut up credit cards was a great icebreaker with new clients!

    Reply
    1. Jeremy

      haha nice gimmick. I’m at that point with my credit card that I used for my last balance transfer. The balance transfer is paid off, but now I have no need for that extra credit card. I’m just not sure if I should cancel it or not since I might be taking on a mortgage within a few months.

      Reply
  10. Kevin @ Credit Bureau Insider

    I have a balance transfer offer sitting right in front of me, and a balance on my card due to some unexpected expenses.

    It will take four months of zero interest to break even on the transaction fee of 4%. Plus the offer states existing balances for direct deposit or check cash advances will go to 15.99% – another catch in the offer.

    I think I’ll pass on the transfer for now.

    Reply
    1. Jeremy

      Sounds like you took the right route of first calculating whether it is worthwhile in your scenario. If you will be able to pay off the debt in just a few months, the balance transfer fee probably isn’t worthwhile. It’s a much better deal when it will still take close to a year to pay off the balance.

      Reply
  11. KIm@Eyesonthedollar

    I’ve saved lots on interest using 0% offers when getting out of credit card debt, but I agree with most of the comments. Transferring a balance does not give your carte blanche to run up the other credit card again.

    Reply
    1. Jeremy

      Smart move Kim. When you’re paying off credit card debt this would be an especially good deal. Since I was using it to pay off car loan debt, I wasn’t saving quite so much in interest.

      Reply
  12. Canadianbudgetbinder

    If I was holding a balance on one and could transfer it to another for a lower interest rate I would most certainly do that. The problem exists when someone says great now I have 2 credit cards that I can put purchases on with their hand on the shovel they begin to dig. There are pros and cons certainly but it all boils down to responsibility with credit.

    Reply
    1. Jeremy

      I agree that it does rely on personal responsibility. In my case I’ve never had a problem with racking up my credit cards. Having more than one credit card doesn’t create any additional temptation. I dislike fees enough that there’s no way I would want to be paying high interest on that kind of balance.

      Reply
  13. The Happy Homeowner

    I took advantage of this concept while paying off my credit card debt years ago ($14K in less than a year…it can be done!). The caveat was that I only took advantage of free-free transfers that offered 0% (or extremely low) APRs. Then, I made sure to pay off as much as I could in the promotional period so that I wasn’t hit with even higher fees, interest, etc. Responsibility is key!

    Reply
    1. Jeremy

      Wow $14k in one year? Nice job. The balance transfer fee is relatively new. A few years ago this could’ve been done much cheaper since there would be no additional fee.

      Reply
  14. MoneySmartGuides

    I’ve done this in the past myself. I transferred all of my debt to a card that offered 0% and no balance transfer fee. Then I made certain I knew the date when the 0% promo ended and paid off the card by that date.

    Reply
    1. Jeremy

      I wish there had been no balance transfer fee when I took advantage of this. It sure ate away at the savings. Without that fee it would’ve been a lot more beneficial.

      Reply
  15. Terry

    Good article!

    I’ve never transferred balances but it makes a lot of sense when you can save money by doing it.

    However, I’ve heard that excessive balance transfer behavior can also make it tough to borrow money from other lenders outside of the credit card industry, such when shopping for a home or automobile.

    Have you heard about that?

    Reply
    1. Jeremy

      No I haven’t heard of that, but I’d think that would be the people who are transferring from one card to another to another. Just doing one on a single loan or credit card balance shouldn’t be a problem. I know I was able to qualify for very good rates with my mortgage pre-approval.

      Reply
    1. Jeremy

      It really can help your financial situation if you are responsible about it. It’s just a matter of knowing what you’re getting into and having a plan to avoid the high interest.

      Reply
  16. Matthew Allen

    I have an online offer for 0% for 18 months with a 3% transfer fee. I’m thinking about taking advantage even though I have a sweet 5 99% fixed rate on my credit union credit card. I might use the promotional deal as a payoff mechanism and then just cancel it and hold on to my current card.

    Reply
    1. Jeremy

      That’s exactly what it is…a payoff mechanism. The main reason to use something like this is to get a big of interest relief to be able to pay off the debt sooner. Of course, you have to decide how long you would need to be able to pay it off with each route. The balance transfer route isn’t always best.

      Reply
  17. Eric J. Nisall - DollarVersity

    Count me among those who believe credit cards are a hugely useful tool. I laugh at people who say they are evil and should be avoided due to the trouble they can cause. Like cars, power tools, weapons, food, medication all don’t fall into the exact same category?

    Anyway, it’s important to note that the folks that are in real trouble won’t be able to use this system of transferring balances. The biggest reason is their credit is probably shot already, which will prevent them from getting new credit lines. Secondly, if they were able to get a new line, the limit would most likely be severely limited since their other card(s) are probably near-maxed. Lastly, 0% offers aren’t universal, rather they are subjectively offered to the better qualified consumers. Anyone looking to this as a “saving grace” should heed this advice before allowing their hopes to get up only to be shattered when they get turned down.

    Reply
    1. Jeremy

      Excellent examples Eric. I was tempted to list some stuff like that though. There are things in life that can be dangerous or extremely helpful depending on how they are used. It is up to us to figure out the best path to take. If you’re responsible and carefully plan things, you can most definitely use credit cards to your advantage.

      It is true that the people in very dire debt situations will not qualify for this kind of debt relief. Some of them do regularly make all of their payments on time and still have decent credit ratings. Many just assume their credit rating is bad due to being in debt. Really though, credit card companies will gladly give more credit to someone who has shown signs of responsibly making companies while also earning the credit card company plenty of profits from the interest they pay.

      Reply
  18. Justin@TheFrugalPath

    Using credit card transfers can be a great way to get out of debt. Even if you pay a fee to transfer the cards, odds are that it’s less than the interest you would pay over the same time. Although you do need to be wary. Don’t keep the balance at it’s maximum until the very end and always read the fine print.

    Reply
    1. Jeremy

      Yes, the fee is usually fairly small compared to what you would pay in interest otherwise, especially if it’s on a credit card. When dealing with that much money on a credit card, you do have to be careful. They are hoping you won’t read the fine print and end up leaving the balance on the card too long or making a late payment.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>