Don’t Balance Transfer Credit Card, Do This Instead To Save $1,000s

You have heard the common advice to transfer your high-interest credit card balances to a new card with 0% promotional APR. But you are costing yourself $100s to $1,000s of dollars doing it this way. When you transfer a balance you pay a balance transfer fee (typically 3-5%) and miss out on $100s in rewards & promos.

There is a significantly better way to use a new 0% APR credit card to get rid of high interest debt. And when you do it right, you get paid money to do it.

If you have high interest debt, don’t do a balance transfer! Do This Instead and Save $1,000s

Instead of a balance transfer, you put all of your spending on the new card with a 0% APR. Then you pay off your old card with your cashflow. Since all your life expenses are going onto the new card, all your income can go to paying down the balance on the old card. Read on to see how this works and why it is better than balance transfers.

[Professor B.T. Effer Note – we have not seen this method recommended in any other personal finance space or from ‘experts’. We are trademarking this as the “Purchase To Transfer” Method ^TM of paying down high-interest credit card debt. Another exclusive improvement from YourFinancesUnFukt.]

How Credit Card Balance Transfers Work

You have credit card debt that is rolling over month-to-month and are paying an absurdly high interest on it (15% to 30%). You make the correct decision to move the debt to a lower APR and read that balance transfers are recommended. Then you find a new credit card with a 0% promotional APR for 12 months. You open the new card and transfer your balance…And then see your new balance is $100s higher. What happened?

Balance transfer fees.

Nearly every credit card has a fee to transfer balances, typically 3-6% of the transfer amount. If you have $10,000 balance, you could be paying $500 in fees. The ‘promotional 0% APR’ is there on transfers because the credit card company is going to make their money with the 3-5% balance transfer fee.

Even worse, you pay this amount immediately and it can be equal to months of interest.

For example, a 24% APR is huge, but it is approximately 2% charge every month. A 5% balance transfer fee = 2.5 months of interest paid up-front.

Now, if you can’t pay off your outstanding credit card bills for the foreseeable future, balance transfers are better than paying years of high interest.

But, there is a way to get your balance on the new card with no fee (and get paid to do it).

Why ‘Purchase To Transfer’ Method ^TM Is The Better Way To Pay Down Credit Cards

A better way to achieve the outcome is to ‘transfer’ your balance through new purchases. The benefits to you are:

• Avoid 3-5% balance transfer fees
• Get promotional rewards for spending on your new card
• Get regular cash back rewards on new spending

Most credit cards come with numerous promotions to entice you to open the card. This is especially true if you have a good credit score. (If your credit score is lacking, read about how to fix your credit score here.)

First, find a card with both a promotional 0% APR for first 12 to 18 months. This promotional APR is almost always on both balance transfers and new purchases.

Second, see if the card has a promotional rewards bonus for spending. Most cards have a $100 to $300 promotional bonus if you spend a certain amount over the first few months. For example, you get $200 in bonus points when you spend $500 in the first 3 months, is common.

Now, do not explicitly transfer the balance from the old card to the new card. Instead, you are going to use new purchases to build a balance on the new card. Pay for every single life expense with the new card. And since all of your spending is going on the new card, you have all the cashflow from your income that isn’t being used on costs of living. Therefore, you are going to use that cash flow to entirely pay off your balance on your old card.

[Professor B.T. Effer Note – even if you transfer your balance to a 0% APR card, you need to make at least the minimum payment every month. If you don’t pay at least the minimum payment on time, you often get penalized with all the back interest. This can be extremely costly, so do whatever you need to make that payment. The minimum payment is often the higher of a few percent of the balance or a flat amount ($25).]

Example: Purchase To Transfer Method ^TM

Let’s say you have $2,000 in outstanding credit card debt at a 24% APR. You open a new card with:

• 0% APR on balance transfers & purchases,
• 5% balance transfer fee,
• $200 promo on new purchases,
• 2% everyday reward cashback, and
• $2,500 spending limit

For simplicity, lets assume every month you spend $2,000 on costs of living (groceries, gas, everyday purchases, utilities, etc).

It is important to know that balance transfers don’t earn any points and aren’t eligible for promotional rewards. If you transfer your balance, you pay a $100 charge (5% balance transfer fee x $2,000 transfer). And you get no points or promotional rewards.

However, you could put all your spending for the month on the new card (up to $2,000). Assume you normally pay cash for all these purchases, at the end of the month, you would have an extra $2,000 in your checking account. That is money you normally paid out for day-to-day expenses but didn’t since all your spending went on your new card.

At the end of the month you would have $2,000 old credit card balance still (plus a small amount of accrued interest for the month). You would also have $2,000 of new purchases on your new credit card. Lastly, you would have an extra $2,000 in your checking account since all your cost of living went on the new credit card.

You use that extra $2,000 in your checking account to pay off your old card. Therefore, you are left with $2,000 on your new card just like a balance transfer.

But you gain the $200 promotional first time bonus by spending $2,000 over the month. You also earned 2% cash back on those purchases for another $40 in rewards. And avoid the balance transfer fee. Depending on the amount you are transferring, this can be $1,000 benefit to you.

Comparison of Balance Transfers vs Purchase To Transfer Method ^TM

By comparing the 2 methods you can see the benefits to you:

Using the traditional balance transfer costs you $100. But using the Purchase To Transfer Method ^TM, you gain $200. That is a $300 net benefit to you on a $2,000 balance. You can now take your $240 in total rewards and put it towards your balance, leaving you with $1,760. You have already made a big dent in your credit card balance. And you still get the 0% promotional APR going forward.

Best part, there is no catch.

Why This Works, AKA How Credit Card Companies Make Money

Why this loophole is there comes down to how credit card companies make money. There are 3 ways credit cards make money:

1. Interest charges on outstanding balances
2. Merchant charges on stores when you use a credit card to pay
3. Miscellaneous fees (annual fees, balance transfer fees, cash advance fees)

When you do a balance transfer, the credit card company is losing out on #2, fees from merchants on purchases. And if you pay off your balance in the promotional period, they don’t get any #1 interest charges either. They would be giving you a ‘free’ loan, taking on risk of default, and incurring expenses administrating your account, but would earn no revenue.

This is also why you don’t get any cash back reward or promotional bonus points on balance transfers.

And this is why the opportunity to us the Purchase To Transfer Method ^TM exists. If you are making credit card purchases, the credit card company is getting revenues from merchant stores. Therefore, they don’t need to charge you any interest or fees in the promotional period.

Rolling Credit Card Balance Transfers

You shouldn’t keep a balance on a credit card. But sometimes life happens and you get behind.

One of the biggest benefits of the Purchase To Transfer Method ^TM is that it gets even better if you need to do it again. Let’s say in our previous example you got a 12-month promotional 0% APR on new purchases and transfers. You followed the Purchase To Transfer Method ^TM and after your rewards you had $1,760 balance left. Each month you could only pay the minimum payment of $40 though.

It is 10 months later and you still have a $1,360 balance.

Normally, you would be advised to open a new card, transfer the balance, and pay another 5% fee (another $68). You would do this before the end of the promotion so you don’t pay a high interest charge.

Instead, you repeat the Purchase To Transfer Method ^TM of opening a card, spending $1,360 of everyday expenses and using the ‘free’ cash to pay off your old balance.

But this time, you weren’t incurring interest on the previous balance by waiting a month. That $40 interest charge in the previous example is $0 since there was no APR on it. It is a ‘free roll’ balance transfer with NO costs to you.

And you get another $200 promotional reward and $27 in cash back on purchases (2% x $1,360 purchases). That is $227 more rewards dollars you can put into your outstanding balance, bringing it down to $1,133.

You have now paid $467 of your balance off with ‘free’ money from your credit card companies.

In theory, as long as your credit score is high enough that you can keep opening beneficial credit cards, you could do this indefinitely until your balance is paid off. Every year you could get a bonus $200+ payment on your outstanding balances from rewards while you work to pay down your debt.

This is a huge difference to paying money to do a balance transfer and every year getting a fee that sets you further back. When done correctly, this is a negative interest loan from the credit card company. You make money for carrying the balance.

When To Do A Regular Balance Transfer

The Purchase To Transfer Method ^TM is likely the best option for those with a relatively low credit card balance. However, there are some times that it is still better to do a regular balance transfer. If you have massive outstanding credit card that is more than you spend in a month or two, the interest charges you incur while you make purchases may negate the benefits.

For example, if you have $10,000 of credit card debt and spend $1,000 a month, it would take 10 months to transfer your balance with purchases.

[Professor B.T. Effer Note – You could look to only transfer some of your balance and use the Purchase To Transfer Method ^TM for the rest. For example, in the above, you could balance transfer $9,000 and use the Purchase To Transfer Method ^TM on $1,000 to get the promotional rewards. But this may require using more than 1 card as a $10,000 credit limit is likely hard to get.]

Another reason to do a regular balance transfer would be if you have a poor credit score. (What is a good credit score? Find out here). Poor credit scores tend to lead to not being eligible for the good promotional offers. If you can’t get accepted for a card with promotional rewards, you may have to resort to a traditional credit card balance transfer.

Are There Other Options To Paying Off Credit Card Debt?

Balance transfers and the Purchase To Transfer Method ^TM are 2 options to handle outstanding credit card debt. However, they may not work for everyone. Especially if you are unable to get a new card due to poor credit scores. There are other options that you may want to consider if your situation is dire:

• Credit Cards For Poor Credit Scores: There are credit cards out there purely for those with poor or no credit. Some of these cards are marketed as ‘credit score repair’ cards. They tend to have no or immaterial rewards and their purpose is to help those with low/no credit. If traditional credit cards are unavailable to you, you may be able to reach out to a lender to transfer a balance in the meantime. These cards may have APRs on the lower end (15%) of the range and can save you some money while you build up a positive payment history.
• Personal loans: Banks and credit unions have personal loan options that may have lower APRs than your credit card. Often these loans are available in the 8-10% range which is much less than the 25% APR on credit cards.
• Debt Restructuring: There are services that will buy your debt and work with you to pay it off. Many of these are with fairly irreputable companies though, so be careful.
• Call Your Credit Card Company (Credit Card Settlement): Many credit card companies are willing to work with you if you are unable to pay off your debts. This typically involves freezing your card and setting up a payment plan. If you push hard, you may be able to get a reduced balance if you pay on time. However, there can be tax consequences and negative impacts to your credit score.
• Bankruptcy: This option may be right for you if you are too far behind. Credit card debts can be wiped in a bankruptcy, however it has a huge negative impact on credit scores and future borrowing.

The Final Word

Credit card debt stinks.

Great job taking the first steps to try to pay down your debt.

You don’t want to pay the very expensive, high APR on credit card balances and using a new card with a 0% promotional APR for a period of time is a great way to avoid the interest. However, traditional balance transfers come with a high, up-front charge of 3-6%.

A better method for most people is the Purchase To Transfer Method ^TM where you roll over your debt through purchases on the new card. You avoid balance transfer fees and get the benefit of promotional rewards and regular cash back. This can save you $1,000s over your debt payoff journey.

Frequently Asked Questions (FAQs):