You’ve probably heard about credit card balance transfers, but may not be entirely sure when to use them.
Put simply, they are best served during times when money is tight, or if you’ve racked up a ton of credit card debt. Usually these two items tend to go hand-in-hand.
If and when you don’t have a lot of money at your disposal, or simply don’t want to tap into your limited liquidity, you’ll probably opt for credit.
The problem with credit is that it isn’t free, so you must pay interest to borrow money from a credit card company.
Buying a Home is Expensive
One of the most cash-strapped times tends to be after the purchase of a home.
After all, you need to come up with a hefty down payment, pay sky-high closing costs, begin making mortgage payments, and furnish the place!
Trust me, after 10 visits to Home Depot in the course a week you’ll see what I’m talking about.
There’s no way around it – you will spend money, and lots of it. But you may not want to pay it all back right away. Heck, you may not be able to pay it all back right away.
It’s for this very reason that all the electronics and furniture stores offer 0% APR for 12 months, 24 months, and so on.
They already know you’re strapped for cash, but they still want you to buy that new couch, or that 55-inch LCD TV, even if you can’t afford it.
Their solution is offsetting the interest into the future. While this is all good and well, you can’t go to store after store, opening new lines of credit with each company.
After a while, you’d probably get denied as your credit score would begin to take a dive, and prospective creditors would see you as pretty darn risky.
So how do you avoid making yourself cash-poor without taking out 10 different lines of credit and paying costly finance charges?
Use a Balance Transfer Instead
With a credit card balance transfer, you can rack up debt on your existing credit card and then get the balance transfer credit card issuer to pay it all off before your due date.
Let’s look at an example:
Existing credit card: $10,000 credit limit
Balance transfer credit card: $15,000 credit limit
New purchases: $7,500
So let’s say you buy a new house or condo, and then go out and charge some big-ticket items, such as a new TV, a new couch, a dining room table, and so on.
You use your existing credit card as you normally would, ideally one that earns cash back or some other type of rewards.
After a week or two, your credit card balance swells to $7,500, not too far from your $10,000 credit limit.
In about a month, you’ll either have to pay that scary big balance back in full, or subject yourself to finance charges.
Unfortunately, you’ll also be making your first mortgage payment around that time, and cash could already be tight.
Instead of stretching yourself too thin, you could transfer the $7,500 in new purchases to a balance transfer credit card that offers 0% APR.
Simply open the balance transfer card, make the balance transfer request for all or a portion of the balance, and then watch as it magically gets transferred to the new credit card.
This way, instead of worrying about paying interest for all your new purchases, you can avoid interest and slowly pay down the balance during the 0% APR period, which could be as long as 18 months.
A balance transfer can provide you with some much needed breathing room at a time when cash is ultra-tight, all while helping you avoid paying anything extra to borrow that money.
For the record, this same method can be employed any time money is scarce.
One word of caution: Wait until your home purchase/mortgage is actually finalized before opening any new lines of credit or charging any large purchases.
Lenders run credit checks when you close your loan as well, so if you go nuts and start spending before the deal is done, it could put the entire mortgage into jeopardy!