As I said in my last article on the topic, banks and credit card firms are once again giving 0% introductory rates on transferred balances. There was a time when offers to transfer balances with no balance transfer fee, no interest, and no annual credit card fee were commonplace.
Due to the tightening of loans during the current economic slump, balance transfer costs have increased to a range of 3% to 5% in recent years.
Recent deals, however, have shown signs of returning to 0% interest on balance transfers. When and how may you use them to your advantage? Listed below are four distinct approaches to taking advantage of these deals:
1. Reduce balances on high-interest credit card loans
By transferring high-interest credit card balances to a card with a 0% APR, you can reduce your interest payments and pay off the principal balance faster.
If you have racked up a sizable credit card load with an interest rate of eight percent, fourteen percent, seventeen percent, or greater, you can get a leg up on paying it off by transferring the balance to a new card with a zero percent interest rate.
The risk arises when debtors, having transferred their balance on a new credit card, continue to use that card, rather than cutting it up or freezing it, until the debt is paid in full.
2. Repay other debts
People I know have taken advantage of 0% APR balance transfer offers to pay down major loans like student loans, home equity lines of credit, and auto loans. Using a balance transfer in this way can be complicated since once the promotional period ends, the loan must be paid off or transferred to another 0% offer, or else the new rate could be quite high.
So, if you owe $10,000 on your family car at 9% interest, but have a new credit card with a 0% APR for the first twelve or eighteen months, you may save a lot of money by transferring the balance.
For the duration of the promotional period, every penny you pay will go directly toward reducing your principal debt. Unless you make another transfer or pay off the balance before the introductory period ends, your rate may increase to a significantly higher amount than 9%.
Using a 0% balance transfer for this purpose is most effective if you are very close to paying off the transferred debt in full during the promotional term.
3. Generate Income From Balance Transfer Arbitrage
By transferring a large sum of money from one credit card to another at a 0% APR, then investing that money in a high-yield savings account, paying off the original credit card balance before the introductory APR period ends, and pocketing the difference, a person can engage in a strategy known as credit card arbitrage.
Over the past few years, balance transfer arbitrage has been unfeasible due to the rise in balance transfer costs and the precipitous drop in savings account interest rates. In order to come out ahead, the savings account interest rate must be greater than the interest rate on the credit card amount.
If you want to take advantage of high balance transfer rates, you’ll need to use more high-risk strategies, such as investing in the stock market, gambling, or borrowing from strangers on a peer-to-peer lending website.
4. Utilize as a reserve fund
Many people have struggled to accumulate an emergency reserve. Maintaining some 0% balance transfer funds in the bank is an intriguing way to prevent having to take out further loans when your transmission breaks or your child needs to go to the hospital.
In other words, if you are disciplined, a rolling 0% balance transfer can be a low-cost option to tackle a financial disaster if you don’t have an emergency fund and have little cash on hand.
Only use the funds if they are absolutely necessary, and make sure to pay them off or roll them over before the introductory period ends. This money isn’t for a trip to Disney World—for it’s an emergency!
In the following piece of this series, I’ll discuss strategies for using a line of credit with a 0% balance transfer rate to access cash.
