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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.

By
Laura Adams, MBA,
Episode #563
How to Save Money Using a Balance Transfer Credit Card

3 Pros of Using a Balance Transfer Credit Card

Here are three advantages of using a balance transfer credit card:

  1. 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.
  2. Paying off debt faster. If you use savings from doing a balance transfer to pay down debt balances, you will eliminate them faster.
  3. 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:

  1. 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.
  2. 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.
  3. 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 Education 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:

  1. Transfer your highest-interest debts first. Getting rid of your most expensive balances first saves the most.  
  2. 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.
  3. 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.
  4. 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.
  5. 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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