Use Transfers to Cut Credit Card Interest


By Jeff Brown

Thanks to the financial crisis, credit card issuers aren’t flooding Americans’ mailboxes with card deals the way they were a few years ago. But if your credit is good, you’re probably still getting a few offers, many with cut-rate terms on balance transfers. lists numerous cards offering zero-percent interest rates on the debts transferred from other cards. Typically, the new card provides checks used to pay debts on the old card.

Transfers can be a good way to cut interest charges, so long as you avoid the pitfalls. On any card deal, be sure to study the fine print.
The key question is how your monthly payments will be credited. There may be no interest charge on the transfer for six to 12 months, but new charges accrue interest if they are not paid off within the ordinary grace period, usually about a month.

The problem is that your payments are typically credited to the zero-interest portion of your debt until it is paid off. Until then, interest on the new charges will pile up.

Imagine you transferred a $2,000 balance from a card charging 18% to one with no interest on transfers for six months. You could save upwards of $180 in interest.

But if you used the card for $1,000 worth of new purchases, you’d have to pay interest on these charges until the $2,000 transfer was paid off. To avoid interest charges, you’d have to pay off all $3,000 in debt within the first month or so of making those new charges.

In many cases, failing to meet the deadline for paying off the balance transfer will trigger interest charges as if there had been no zero-rate period. In some cases there will be a penalty rate that can approach 30%.

Trying to game the system can backfire. In theory, you might transfer a balance from card to card to card to enjoy zero-interest rates forever. But every new card will appear on your credit report, flashing a red flag to lenders.

Even if you cancel the old cards and keep the debt from ballooning, card hopping will make you look like a high-risk customer who is avoiding paying the debt. It could hurt your credit rating, leading your card companies to raise your interest rates, and thus making it hard (or even impossible) to get new cards, a mortgage or auto loan. Additionally, in most cases, rewards programs like frequent-flyer miles do not count transfers.

To avoid the traps, the simplest strategy is to open the new card, make the transfer, then refrain from using the card for additional charges until the transferred balance is paid off. Use the tool to find cards offering zero rates on transfers. Many, such as American Express (Stock Quote: AXP) and Discover Financial Services (Stock Quote: DFS), require excellent credit.

The best plan: Don’t allow card balances to build up in the first place. That way, you’ll never pay interest.

Credit cards are best used for convenience, so you don’t have to carry cash or get a check approved. They’re not a good option for borrowing, because interest rates are too high. You can get the same convenience with a debit card, which draws on your checking account and does not accrue interest.

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