How a Balance Transfer Credit Card Can Help You

A balance transfer credit card can come in handy, especially if you're in debt. Individuals looking for credit guidance are becoming increasingly charmed by companies who are offering cards with low balance transfers and 0% APR rates. Generally speaking, anyone is eligible for a line of credit as card companies are eager to acquire more customers. With most companies charging high interest rates, consumers are erring on the side of caution and avoiding falling into a trap. Using a balance transfer credit card can be a clever method of reducing large amounts of debt, and many consumers are actively looking for companies that offer zero to two percent interest. By transferring funds to the new credit company, you are thereby reducing recurring interest charges on the amount owed and are able to pay within a generous window of time, which can last from six months to a year.

Keep in mind, however, that many companies will attempt to trick consumers by placing pertinent information in fine print - take the time to read the rules and regulations thoroughly before acquiring a balance transfer credit card. Make note of the introductory period length as well as what the annual percentage rate is upon expiration of the introductory period. Hopefully, the company is offering balance transfers with 0% APR for an extended period. Also, find out if you qualify for the introductory rate as this ultimately relies on your past credit history. Most importantly, research the balance transfer credit card fees, which can range from low to excessively high. Once you've taken the time to compare your options, the benefits of a balance transfer credit card will become clear.

What to Make of Balance Transfers with 0% APR and Interest Rate Offers

Generally speaking, most people are unaware that cards with balance transfers of 0% APR can be used to their benefit when a large existing balance on a credit card is looming. So, how should consumers makes the most of these balance transfers with 0% APR offers for new purchases?

Most credit card companies offer balance transfers with 0% APR to customers who have excellent credit, and the offer is usually good for a one year billing cycle. You can use these offers during a time when you will be making a large purchase, whether you are buying a new home and need to furnish it, looking to purchase a car, or buying new electronics for Christmas. All of these times would be ideal opportunities to use balance transfers with 0% APR on new purchases.

Use a Card with Balance Transfer and 0% APR to Make Large Purchases

Imagine someone moving into a new house. There are many expenses associated with this type of transition. Expenses like couches for $4,000, entertainment systems for $5,000, and dining sets for $3,000 can begin to add up significantly. Now that this new homeowner has just spent $12,000, how can he ameliorate the high costs of these purchases?

If he had received a card with 0% APR interest rate on new purchases and balance transfers immediately prior to making these purchases, the new homeowner would have up to the first date of purchase to use the 0% APR benefit. Assume he purchases all of these items on the same day on this balance transfer credit card. Instead of spending $12,000 in cash on these items, he uses the card and invests the cash elsewhere. Let's say that he took $3,000 for the first 3 months and put that away in a low-interest-bearing checking account to pay for the initial payments and the rest into a high-yield checking account paying 4.5% for one year. Here is what will happen to the homeowner's money invested at an interest rate of 4.5%:

Month/Amount/Interest
1/$9,000/$33.75
3/$9,000/$33.75
6/$6,000/$22.50
9/$3,000/$11.25
12/$0/$---
Total Interest Earned: $236.25

The homeowner just made over $236.00 borrowing a credit card company's money with his balance transfer credit card. For anybody that tells you it's not worth it, don't listen. All you do is write one check a month to the credit card company, and you find yourself with a $236 bonus. Take advantage of these credit card companies when you can...otherwise, they will take advantage of you.

Creating an Interest Rate Arbitrage Opportunity with 0% Offers

Much like the example of the new homeowner, taking advantage of credit card companies for their offers is a time-tested strategy that you can benefit from. Obviously, one of the best offers out there is for balance transfers with 0% APR. While the advantage of using these offers for purchases or balances on your credit cards is valuable information, the power of interest rate arbitrage and how you can use credit card companies' offers for balance transfers with 0% APR is more applicable in creating a profitable opportunity for you!

The offers vary, but most of them give cardholders introductory balance transfers with 0% APR on all new purchases and all subsequent balance transfers. When you do a "balance transfer" with your credit card, most card companies will issue a check to you in your name for the amount that you are transferring over. Some cards, depending on your credit, will allow for up to $25,000 to be allocated. Some card companies make the process much easier than others, but you can request and receive via mail the balance transfer check. As soon as you receive it, you deposit it in a high yielding money market account. Assuming you can find a money market account yielding the short term rate of 4.5%, you could make a couple of dollars off of the credit card company lending you money for free.

Compare Your Options

If you have a large amount of debt, a balance transfer credit card can provide the relief that you need, but it can be used for other things as well. Using a balance transfer credit card to make large purchases can help alleviate the burden of spending such a large amount of money at one time. As evidenced by the example, use the credit company to your advantage as well as cards with offers of balance transfers with 0% APR rates. Understanding how credit works can help you get money in the bank and into your hands.

The most important lesson with a balance transfer credit card is to use the information wisely. A simple slip-up can cause your credit rating to go sour or you can be charged a high fee to transfer the actual balance of your account. Credit should not be taken lightly so ensure that you understand how your balance transfer credit card works. By taking the time to read your rights and the credit company's rules, you'll be well on your way to paying off your debts and earning some money through interest!

Woody Alpern, CPA, is the founder and creator of MyCreditCard.com, an online service that lets you compare credit cards and choose the best fit for you. He is the co-founder of both Capital Investment Advisors and Capital Benefits Administration, Inc. He is also a partner in both firms. In addition, he serves as CEO of real estate investment company Roswell Holdings, LLC. A graduate of the University of South Carolina with both a bachelor's degree and a master's degree in accounting, Alpern spent several years in the tax division of the accounting firm Touche Ross (now Deloitte & Touche) before partnering with Michael Reiner to found his own businesses.