With more and more credit card options becoming available, it’s easy enough to end up with two, three, or more different credit cards. Credit cards allow you to accumulate a large amount of debt in a fairly short amount of time, and the interest can be crippling. However, although this might seem like a serious problem, with increasing numbers of credit card companies offering fee-free balance transfers, you can save yourself a significant amount of money in interest.
First and most obviously, if you have a significant amount of credit card debt, transferring your balance to a new credit card can save you a lot of money. Companies which offer balance transfer credit cards typically offer a 0% interest rate for a limited length of time (anywhere from three to twelve months), sometimes with a reduced rate after this initial period expires. If you are using a balance transfer credit card as a way of consolidating and reducing your credit card debt, this interest-free period is a great way of reducing the cost of your debt and helping you pay it off more quickly.
If you are thinking of handling your credit card debt in this way, there are a few things to bear in mind. Firstly, the 0% interest rate typically applies only as long as you make your monthly card payments on time. If you default on even a single payment, you may suddenly find you have to pay interest after all. Secondly, if you are transferring the balance from multiple credit cards, you must make sure that all transfers made apply for the 0% interest rate—some cards only offer this rate on the initial balance transfer.
Third, make sure you are aware of “hidden” fees such as annual fees and transfer fees, as well as the interest rate you will pay once the initial 0% period expires. Finally, note that balance transfer credit cards are usually most advantageous for those with good credit—if your credit is bad you may not qualify for the low initial interest rate.
Using a balance transfer credit card can simply be a good way of reducing the amount of interest or fees that you pay each year, even if you don’t qualify for a 0% interest period. For example, let’s say you have a credit card debt of $1,000 and your current annual percentage rate is 20% ($200 annually).
If you transfer your credit card balance to a card with a 10% APR, you still come out ahead in the long run even if you have to pay a transfer fee of up to 10%. In the first year your APR will cost you $100 and you’ll pay a $100 transfer fee, but after that first year, you’ll be saving money due to your lower APR. Given that the average American has a revolving credit card debt of approximately $9,000, balance transfer credit cards can offer substantial savings.
The second benefit to using balance transfer credit cards is less obvious, and can be a little more complex. If you have the time and energy to spare (and be warned—this can be a very time-consuming practice), it’s possible to maintain a credit card balance that you never have to pay interest on. By consistently transferring your balance to a new balance transfer card each time you near the end of the 0% interest period, you can avoid paying interest altogether.
Note, however, that investigating the hidden costs is particularly important in this situation—it’s a pointless endeavor if you end up paying more in transfer fees than you would if you simply stuck with the same credit card. Additionally, be aware that multiple credit card balance transfers, and even multiple credit card applications within a short period of time, can negatively affect your FICO score.
This strategy can even be a valid method of making money—a balance transfer credit card can essentially be used as an interest-free loan. If you’re prepared to spend the time hunting down new balance transfer credit cards to use, you can borrow money at 0% interest, invest it, and then transfer the balance to a new card each time the interest-free period expires.
If you’ve invested wisely, you can use the returns on your investment to pay off the principle on the credit card debt in full before you ever have to pay interest. Of course, as with all other methods of utilizing balance transfer credit cards, it is vitally important to investigate all the hidden costs. Equally important is investigating your investment options thoroughly—if you make a poor investment choice, you’ll end up with credit card debt that you might find difficult to pay off, with no return in sight for the money you’ve spent.
In short, balance transfer credit cards can be hugely advantageous no matter how you choose to use them. It is, however, important to make sure you research your options thoroughly before applying for any new credit cards. Make sure you qualify before applying for a card to prevent rejection from affecting your credit rating, and investigate those hidden costs so that you can be sure that a balance transfer credit card will save you money.