How to Effectively Use 0% Balance Transfer Credit Cards

Today I want to discuss how you can properly use zero percent credit cards in connection with a debt repayment plan, or even as a way to make some extra money.

A few months back I warned of the dangers of zero percent interest rate credit card balance transfers. I still stand by those points, but at the time I promised I'd follow up with my story of how I successfully transferred my credit card balances. I also promised I'd share some tips for making the balance transfer work for you. That's why I'm back today to help fill in the gaps on the process.

How I've Used Zero Percent Balance Transfer Credit Cards

Back in 2001 I had about $3,000 in credit card debt. Around that time decided it was time to quit spending more than I was earning and pay off the debt completely. I had wised up. Specifically, I realized I was paying a bunch of money in interest by keeping that balance AND that extra outflow was keeping me from achieving other goals.

So, I came up with a plan to pay it off. It was a simple plan that included throwing any extra money left over each month at the debt. I decided a piece of the plan would be to used a zero percent credit card to help:

  • lower the amount of interest I was paying while I paid it off,
  • and motivate me to pay it off quicker (by the end of the term).

It worked. It took me about 6 months to pay it all off.

I've also used zero percent interest rate deals in other instances. I may go into these more in a later post, but I actually used a zero percent credit promotion when I got Lasik surgery and a zero percent credit card when I paid for some wedding costs. In both instances I never paid a dime in interest, I racked up a bunch of credit card rewards, and never had to tap into my short-term savings.

Why Use a Zero Percent Balance Transfer Credit Card?

0 Balance Transfer Credit Cards

There are a couple of good reasons to consider using zero percent balance transfer credit cards:

Paying Down Debt – The first and obvious reason is to help you pay off debt. While the transfer itself isn't going to pay off your debt, making the transfer will mean you are paying less in interest payments while you pay down your debts. Make sense?

You might currently find yourself in a bunch of credit card debt. Not the end of the world. But maybe you've built up a balance over the years and you've just been paying the minimums. This is the best reason to use the zero percent balance transfer credit cards, in my opinion.

Credit Card Arbitrage – Second, you might want to do what's called credit card “arbitrage”. This is where you apply the transfer to an old card that doesn't have a balance. You receive a negative balance on your card. You then ask for a refund of that negative balance. The money can then be used to earn more money.

How does that work? Well, in the past people would do this by placing the money in a high-yield online savings account. Since those accounts aren't paying that much in interest these days, people have turned to riskier strategies, like micro-lending.

The bottom line with arbitrage is that you are using the credit card promotional deal to get free money so that you can earn money with that money elsewhere. I'm not going to address this much more in this post, but I will promise to cover it in a future post and to share some of the better strategies out there today.

Warning: Don't use this 0% balance transfer credit cards strategy if you are simply planning on consolidating debt in order that you may free up room for more spending on credit. This is the wrong way to use this strategy. Just don't do it. It will only encourage you to rack up more debt and give you a false sense of security. Only use a zero percent balance transfer if you are on a serious debt repayment plan, or you have no debt and want to responsibly take on an arbitrage strategy.

The above word of warning was not meant to discourage people who are in dire straights from using these cards. I realize people often turn to these cards when they are experiencing a temporary financial set back, like a job loss or injury. By all means use these cards to help float you over that down period. Just remember to be aware of the dangers.

How to Evaluate Zero Percent Balance Transfer Credit Cards

So which card should you go for? There are a couple of things to focus in on when looking at credit cards with 0% promotional interest rates:

  1. The length of the zero percent promotional period (or term). This can be anywhere from 3 to 18 months. Obviously the longer the period, the better the deal. You know how long it will take you to pay off your debt, so make sure you get a card with a period long enough to cover you.
  2. The balance transfer fee. This is the fee that the credit card companies will charge you to make the transfer. It can be anywhere from 0-3% of the balance you are transferring, and/or a minimum of $75. This is the difference maker. Compare this fee with the amount of interest you'd expect to pay on the card if you did nothing but continue on your debt repayment plan with the old card. If the fee is higher, then don't do the transfer.

See my review of some of the best 0% balance transfer credit cards.

How to Make the Credit Card Balance Transfer

  1. Understand the dangers.I can't stress this enough. Playing with credit cards is no amateur sport. You have to understand the rules and be disciplined throughout the process.
  2. Check your credit. It might be a good idea to check your credit report and score. To get the card and the limit you'll need, you'll need a decent score. No sense going through this process if you can't move that much money.
  3. Find the Right Card. Using the criteria listed above, determine which credit card is going to suit your needs.
  4. Apply for the new card and ask for the transfer. Now that you have decided on a card, complete the application, making special note of the balance transfer section. This is where you will need to put your card number and latest balance. It's obviously a good idea to have your statement available for reference.
  5. Don't close out the old card. But don't use it either. Lastly, after you transfer your balance, make a point to not use the old card. Remember, making the transfer isn't a license to rack up more debt. It's a chance to pay down debt without paying interest. Put the old card somewhere where you won't be tempted to use it. But don't close the account as the available balance and credit history both positively affect your credit score.

Have you every used a zero percent balance transfer credit card to your advantage? Share your experience in the comments below…

Photo by: Andres Rueda

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  1. Vicky Pal says:

    Great post..!  Can we use the balance transfer money to invest in stocks or bonds and pay off this meanwhile ? Is this a wise move ?

  2. 4miracles says:

    We received a promotional 0% balance transfer, but only for half of what we owe on our high interest card.  However, we have been receiving checks from our high interest card to pay off other card balances at 0% promotional offer until 8/2013.  Can I toggle between the two companies so that each holds 1/2 of our current debt; paying off one with the other and then back again to bring our entire balance through the promotions to 0%?  Is this a wise move?  Really trying to pay off our debt as soon as possible, but keep the cards.

    • Philip Taylor says:

      Yes, you can. But be aware of fees and how they compare to the interest you would pay had you left things alone and just got really aggressive. Good luck!

  3. Kevin Cummings says:

    I owe 22k on one card, partly from my divorce, partly from spending too much, and partly from work being poor.
    I just got a no interest card, 0% till next september. I set up the first transfer to max it out at the 5k limit. 
    Am I better off paying the minimum on the big card, paying as much as I can every month on the new card, and then doing another transfer (with 3% fee) every month?
    Or is it better to pay the minimum on the new card and try to hammer away on the big card?
    The new card said wait till the 7th month to request a limit increase. With a credit score of 739, do you think I could get another no-interest card to park debt on?

    • Philip Taylor says:

      Definitely pay the minimum on the new card until the deal expires. Then pay it all off. Pay the most you can each month on the 22k (now 17k) card. And yes, try to get another balance transfer card from another issuer. You may also look into peer lending:

  4. This really is a fascinating post. However, I would not give the advice that you have concerning credit card arbitrage. Investment strategies that involve debt (e.g. trading on margin, credit card arbitrage, borrowing money) is very risky and the average investor doesn’t have a reason to engage in that level of risk. Trained investors who do it for a living is another matter. But the Average Joe should stay away. As per the debt consolidation and lower interest rate, I agree.

  5. Excellent post. I also no longer need credit cards in my life, but I WANT them. Why? Rewards! I pay my balance in full each month, accrue no finance charges, and I get a $250 best buy card in the mail every few months (reward of my choice, I’m a tech junkie). So essentially I’m able to spend a free $250 just by using my credit card instead of my debit card for purchases. Pretty sweet deal I’d say!

  6. I have used balance transfers several times. I haven’t always been smart about them in the past, and the time period would run out with balances still on the cards…and back up went the rate. Currently, I have a zero percent transfer on two cards that run out in January, and a 1.9% transfer that runs out next June. I am aggressively trying to pay down my debt, and am trying to use transfer offers as a tool.

  7. Thanks for sharing, Matt. I intend to learn more about the micro-lending services soon. Seems like a good tool to use in certain situations.

  8. Great write up PT. Instead of going this route I chose to go with Lending Club.

    I was doing a consolidation of high interest debt, so the 0% CC balance transfer game was not my best option.

    FWIW, I have been very satisfied w/my Lending Club experience.

  9. The Biz of Life says:

    PT, thanks for the thorough discussion on this topic. To answer your question, no I’ve never done a 0% interest rate transfer, but then I pay off my balance in full each month and only have 2 credit cards solely for the rewards. I’m at the point in my life where I could be self-funding if I wanted and don’t really need credit cards at all.