4 ways to save money with credit card balance transfers

Do you pay interest each month on a credit card balance? To avoid paying high interest fees, it's best to avoid keeping a balance on a credit card account. However, if you are carrying a credit card balance, you can save on interest costs through balance transfers. Some financial institutions offer lower interest rates for a limited period of time to convince you to transfer your balances to them.

A credit card balance transfer can be a good idea if you follow the rules, says Tamara Kelly, director of education for the nonprofit Credit Services Consulting. Paying less interest is a good thing and makes sense if you don't have access to a lower interest line of credit.

Here's how balance transfers could help you save money and what to watch out for if you decide to try the experiment.

Lower interest rates

Credit card companies may offer lower interest rates for a limited period of time to encourage customers of competing companies to transfer their balances home or make a purchase using a balance transfer cheque, says Richard Moxley, credit expert and author of The 9 Rules of Credit. "Compared to the 18% or more you normally pay on a credit card, rates of 0% to 4% are a dream come true. Over the past four years, I have used balance transfers to finance my business at an average interest rate of 3%.

Debt consolidation

Transferring balances to a card that offers a better rate could help you manage your debts, but not complying with the terms of the offer could cost you dearly.

Pay attention to details such as missed payment clauses. "If you miss a payment, it could raise your interest rate," warns Tamara Kelly. It is your responsibility to make your payments on time and if you pay electronically, it may take two to three days for your payment to be made to your credit card company. 

Interest rates can also rise if you exceed your credit limit. Other times, it costs money just to accept the offer. "There may even be a fee to pay as soon as the account opens," says Tamara Kelly.

Paying off debts faster

Balance transfers could speed up the repayment of your debts if you are organized and committed to reducing your debts. "One of the most important things to remember is to cancel your original credit card so you won't be tempted to use it," Kelly advises. "It is also important to have a repayment schedule. Usually, promotional rates are offered for six months to a maximum of one year," she explains.

To pay off your balance before the promotional rate ends, Richard Moxley recommends scheduling automatic payments. "My suggestion is to take the total balance plus fees or interest and divide by the number of months the promotional rate is offered. Then, schedule your automatic payments of the amount obtained in order to repay the balance in full before maturity," moxley suggests.

Beware of extra spending on the map

While your transferred balance may benefit from a lower promotional rate, remember that all new balances on your new card will be subject to the current interest rate. According to Tamara Kelly, credit card payments generally apply first to balances with higher interest rates and balances with lower interest rates are paid last. When we know that, it can help us reduce our expenses.

Pay particular attention to your special interest rate, the duration of the offer and the restrictions. When used wisely, balance transfers can help you pay less interest and keep more money in your pocket.