I am different from many personal finance bloggers in that I don’t see a problem with leveraging credit. Obviously, it can backfire on you, so you have to assess the risk. But if you understand credit and are able to make the payments, why not take the opportunity it provides to increase cash flow or pay down debt more quickly?
What is a 0% Balance Transfer?
Credit cards often offer promotional 0% interest rates for you to transfer balances from other credit cards to their accounts. Sometimes they even send you checks for larger purchases. The length of the promotional rate can be anywhere from 3 months to 18, or even 21 months! Sometimes they will wave a fee for transferring the balance, or at least lower it. The norm is 5%, but can be 3% or lower. At the end of the promotional rate whatever you haven’t paid is subject to interest. Obviously the credit cards are hoping that you don’t pay off all that you transfer to them so that they can make money.
I have signed up for new cards to get the promotional rate. I have also been offered the promotion from my current cards. The better your credit score, the more likely you’ll get the offer from your current cards.
What I’ve Used Balance Transfers For
The first time I used a 0% interest balance transfer offer was right after we bought our house. We knew we needed to get a new roof (and even negotiated for the sellers to pay for half of a dimensional roof) within a year.
I did a bit of credit card hacking first. Mr. Beach Life and I each got a Southwest credit card because we knew that we’d be taking a family trip to California. The 100,000 Southwest miles were enough for the three tickets to visit my family that summer. I split the cost of the roof between the two cards, and then used a balance transfer on a credit card I already had to pay the remaining $5,339. It had a fee of $160.17 for the privilege of taking 15 months to pay it off.
The second time I used a balance transfer was that fall when we renovated our basement and turned it into an Airbnb space. I transferred about $11,000 to a card I already had with no transfer fee! Again it was for 15 months and I had to paid off before the promotional rate was over, which wasn’t a problem.
ALL the Expenses
More recently, I’ve used the balance transfers to fund our kitchen and bathroom renovation. For this one, I signed up for a Chase Slate card which gave me 0% interest for 21 months with no transfer fee. Unfortunately I was only approved for $5,000 and the renovation cost 3 times that.
For the rest I put the charges on my credit card with 1.5% cash back, then transferred the money over to two of the credit cards I already had that offered the 0% interest.
The balance transfer for the basement reno allowed us start earning income right away. We booked graduation weekend (the biggest weekend in our town) the first day we listed our space. Since November 2015, we have made at least our mortgage payment. More often than not, we make double our mortgage payment. The balance transfer allowed us to up our cash flow immediately, while gradually paying off the expense.
My latest balance transfer saved me money on interest payments. The kitchen and bathroom renovations were originally supposed to be paid off by getting a HELOC, but recently Mr. Beach Life and I decided against that. I knew I wasn’t going to be able to pay the balances by the time they were due. Luckily, one of my cards offered a 15 month interest free offer, with a lower transfer rate than usual. I paid $209.51 to extend the payment dates, but faced more than $300 in interest payments with my best case scenario.
Balance transfer offers can help eliminate debt more quickly. Because you’re paying $0 in interest over the promotional time, 100% of your payment is going toward principal. If you are serious about getting out of debt and have the offers available to you, it can help decrease your balances quicker and give you more bang for your buck. Lucy over at A Dime At a Time is using this strategy right now.
Ashley over at Blogging Away Debt has used this strategy in the past to tackle her mountain of student loans!
Not being able to pay the entire amount by the end of the promotional rate will result in paying interest. Any reduction in credit card debt is better than no reduction. But don’t let the 0% interest give you false security. You still owe money.
Along those lines, if you haven’t gotten a handle on spending, then the balance transfers might start a cycle of transferring balances then running up the credit cards and needed more balance transfers to make the payments. If you haven’t gotten to a place where you’re using credit responsibly, then balance transfer offers might cost you more than they save.
Where to Find the Offers
If you already have a credit card, you can check your account (or bill if you still get yours through the mail) for the offers.
For opening new credit cards for balance transfer offers, I use NerdWallet. The people behind NerdWallet do the research for you, lay out the pros and cons, and give you estimates for what credit score is needed to be approved for each card.