Strategies for a Balance Transfer on a Credit Card

Zero percent balance transfers were once plentiful, but the Credit Card Accountability Act (CARD Act) of 2010 placed limits on credit card issuers that makes cheap balance transfers far less profitable for lenders. The strategy for balance transfers remains relatively the same -- to save money on interest charges -- but some of the more advanced strategies are almost nonexistent or too risky in 2011.

Saving on Interest

You only want to transfer a balance to another card when the new card offers a lower interest rate. Although the CARD Act pushed creditors to stop offering 0 percent annual percentage rate financing and no transfer fees for six to 18 months by limiting interest rate hikes and fees, some companies still offer this. If you think the introductory rate gives you enough time to pay the balance without accruing interest, you come out ahead.

Arbitrage

Savvy borrowers may realize that they can use a balance transfer to lend themselves money and put that in an interest-bearing account. This becomes most profitable on zero percent offers. You could, for example, make a balance transfer of $50,000 to your savings account. If it earns 2 percent APR, this is an extra $1,000 in your pocket each year. The downside is applications for credit hurt your score and the large amount of debt on your credit profile makes you look in worse financial shape than you really are. Any transfer fees and taxes could make this deal not profitable. If you put the transfer funds in stocks, you also risk losing money to a market crash.

The Fees

Credit card companies make up for the limitations on balance transfers -- creditors can only raise rates if you miss two payments in a row -- by increasing the transfer fee. As of 2011 fees range from 3 percent to 5 percent of the total balance. Five percent on $50,000, for instance, would be $2,500. Compare your monthly payment on the old card to the fee and the expected time to pay off the balance to work out the profitability of a transfer. Divide APR by 12 to get the monthly finance fee. On a card with 12 percent interest, this would be 1 percent a month or $500 on a $50,000 balance. At five months, you break even on a 0 percent card and start saving money on the sixth month. However, if the new card has a higher post-teaser rate, you could end up paying more overall if you carry a balance too long.

Professional Cards

The CARD Act does not cover "professional" small-business accounts, so if you own a small business, you might find better balance transfer offers than those for consumer accounts, such as the 0 percent APR and no fee transfers from before the CARD Act, as business cards are not bound to follow the CARD Act. This also increases risk, because the creditor can give you the penalty rate for paying just a day late. Also, if you make regular purchases on a professional card, the lender can apply payments to the lower of the transfer or purchase balance.