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One of the easiest ways to increase your wealth is to prevent credit cards from eroding away your hard earned money. Ideally, credit card balances (or the statement balance for the current period) should be paid off at the end of each month to prevent paying interest rates. If you already do this, congratulations! You are in the minority, but you might want to keep reading anyway as this article applies to anyone. If you are currently carrying a balance on your credit card and are not able to immediately pay off the balance, this article is here to help you.

For those of you with 700+ credit scores, you might be able to find a credit card interest rate of less than 10%, although even the lowest credit score I have seen is 8%. Even at this low credit card rate, paying an 8% markup on all of your purchases is no way to increase your wealth! For the majority of people though, your rates are somewhat higher than this and can be as high as even 29%!

Ironically enough, the credit card companies can be used to help get you out of credit card debt, and debt free. This is possible because there is fierce competition between the credit card companies for your business.

Be wary of companies that promise to “settle” or “negotiate” with the credit card companies on your behalf to reduce your debt, as this will usually ruin your credit in exchange for some (possible) reduction in bills!

Basically there are a limited number of consumers, and many credit card companies are willing to “buy” your debt for a lower price. They “buy” your debt by you transferring your debt to their company. They will pay off the balance (or any amount you qualify for) at your old company, and you will now be indebted to the new credit card company. The incentive for you is that by transferring you will receive a drastically reduced interest rate (frequently as low as 0%) for a limited period of time.

Transferring a credit card balance will also have effectively no effect on your credit score!  Whenever you apply for a line of credit (a credit card, mortgage,  non-federal student loan, personal loan, etc.), your credit score takes a small “hit,” and is generally reduced by 5-9 points.  So whenever you apply for a credit card (balance transfer or not), yes your credit score will be slightly reduced.  The other side of the equation is your debt to credit ratio.  This ratio is the amount of your debt divided by your total credit.  A lower ratio means a higher credit score.  For example, if you have 2 credit cards each with $3000 credit limits, your total credit will be $6000.  If you have a total credit card balance of $2000 on the cards (combined), your debt to credit ratio would be 33% ($2000/$6000).  Now say that you applied for a balance transfer and transferred your current balance of $2000 to a credit card with a $3000 credit limit.  Now your debt to credit ratio is 22% ($2000/$9000).  Generally, the credit inquiry and the improved debt to credit ratio effects on your credit score will negate each other and there should be no significant change in your score.

Using credit card balance transfer offers will only temporarily delay interest accumulation of your balances. The key to using balance transfer offers is to pay off the debt by the end of the introductory period. The low interest rate helps you with this because more of your money (or all if you get a 0% offer) will be applied to the principle amount, not interest. In step 1 of this article I will explain how to evaluate balance transfer offers, and in step 2 I will explain strategies for paying down the debt before the end of the introductory period.

Step 1: Finding the Right Credit Card Balance Transfer Offer

The Terms of the Deal

Although these balance transfer offers can be great offers, there are some terms of the offers to watch out for, and other terms can make the deal downright worse than keeping the balance on your current card. The three main terms to look out for are:

• Balance Transfer Fees, 3% or less
• Conditions under which the introductory rate will reset (and the reset interest rate)
• Whether the introductory rate applies to balance transfers, balance transfers and purchases, or only purchases (see below, Three Types of Credit Card Offers)

Most balance transfer offers require a “balance transfer fee”, commonly 3%. If you find an offer with less than 3%, fantastic! If the balance transfer fee is more than 3%, it does not automatically make the deal bad but usually is a good indicator.

The conditions under which the rate will reset are also very important. There are specific terms to which you must abide to receive the especially low introductory interest rate. Usually the main points of these terms are:

• Making the “minimum payment” on time, each month
• Not exceeding the credit limit of the new credit card (if you are actually using the card to make purchases)

Three Types of Credit Card Offers with Introductory Rates

1) Introductory rates for balance transfers only

These fairly common offers have an introductory rate for balance transfers, and a different (higher) rate for purchases made with their card. If you find an offer like this that seems to be good in every other aspect but only has an introductory interest rate for balance transfers, it can still be a good deal if you do not use the card for purchases. The reason for this is described below (see “The Terms are Stacked Against the Consumer”).

2) Introductory rates for balance transfers and purchases

These are probably the most common type of offer with the same introductory rate for both balance transfers and purchases. These offers mean that you can transfer a balance to the card, and then make purchases on the card at the same low introductory interest rate. Using the card for purchases is probably not the best idea (ideally the balance should be decreasing!), but in certain situations it might be better to make some purchases on this card as long as the entire balance is paid off by the end of introductory period.

3) Introductory rates for purchases only

This type of offer is as common. The terms of such an offer would transfer a balance at a normal interest rate but allow you to make purchases at an introductory offer. Usually there would be no reason to ever transfer a balance to company with such an offer.

The Terms are Stacked Against the Consumer

When a credit card has a low introductory interest rate for balance transfers and a higher rate for purchases (or vice versa), the way interest is calculated and payments receive is definitely not good for the consumer. Let me explain with an oversimplified, but useful, example.

The terms of our deal are as follows: Introductory rate for balance transfers 0% APR for 12 months, 15% APR for purchases, 0% balance transfer fee. If I transfer $1000 to this card, my balance is $1000. If I decide to use the credit card for purchases, things become complicated. Let’s say I make $500 in purchases and now my balance is $1500. The problem is now I have balances in two different “buckets” with two different interest rates, one that I like (0%) and one that I do not like (15%). The $500 will begin to accrue interest, about $6.25 for the first month. The problem is, I cannot just sent the credit card company $500 and tell them to payoff the $500 balance in the 15% bucket. The credit card company will not let me pay off any of that balance until I have fully paid off the $1000 balance in the 0% bucket! Let’s say I cannot pay off the entire balance until the end of the introductory offer. This $500 purchase would cost me about an additional $80 in interest.

When interpreting how credit card companies calculate your interest rates, a good rule of thumb is, if it creates more interest for the credit card company that is how it will be calculated. If the balance transfer and purchase interest rates are different, it is best to only use the card for the introductory offer to avoid paying finance charges.

Step 2: Paying off the Debt

There are two strategies to pay off the debt after the transfer. The determining factor to which plan you should use will be your self discipline when it comes to spending money. A lot of people spend money before it is even earned, and a much smaller amount of people make sure they have the money before they earn it. Today’s culture of using credit to purchase anything is creating an increasing amount of people that purchase on credit without having the money to pay the entire bill, which creates credit card debt in the first place, which might be why you are reading this article. It’s not a flaw in you, it is a flaw in how we have been educated (or lack of education) about how to spend money. The good news is, anyone can learn to think differently about how to spend money more wisely.

Method 1 for paying off the debt is for people that have trouble with holding onto money when they earn it. If you are the type of person that will spend your paycheck as soon as you earn it, method 1 will be much safer, and have a higher probability that you will pay off the debt.

Method 2 is people who are able to set aside money and not think about spending it, or people that are willing to learn. This method will take a little more self control than the first method. Used correctly, the second method will also pay off debt faster than method 1.

Method 1: Making Your Own Payment Plan

This method involves making a monthly payment plan for yourself and sticking to it. The credit card statements you will receive each month after the balance transfer will tell you the minimum payment amount, which is usually very low. Only paying this amount will not pay off the debt by the end of the introductory interest rate offer, meaning that interest will be added to your balance for the remaining balance at the end of the introductory period (usually 12 months or so). This is where the new credit card companies make their money, and you loose all of your savings by making the balance transfer in the first place! This is why I stress that it is extremely important to pay off the entire balance (or at least the majority of the balance) before the end of the introductory period.

In order to calculate what your monthly payments should be to pay off your debt by the end of the introductory period, you will need to have 3 numbers: the current balance after the transfer (including balance transfer fees), the introductory interest rate, and the length of the introductory offer. The first two numbers can be found on your first credit card statement you receive from the new company after the transfer. The length of the introductory offer might be shown on the statement, or you might need to call the company and ask how long your introductory interest rate offer is in effect. You could also look back at your initial offer paperwork which you used to determine which offer you would use (Step 1 of this article), but you might want to also confirm how long the rate is in effect by calling the company.

If the interest rate is 0%, the next step is easy. Just divide the balance by the number of months of the introductory offer, and that will be your monthly payment amount in order to pay off the debt. For example, let’s say I transferred a balance of $2500 to a 0% card for 12 months (from a credit card with say, 15% APR), with a balance transfer fee of 3% (2500 x 3% = $75). My new balance would be $2575, divided by 12 months and my monthly payment would be $214.59. Paying this much each month would pay off the balance before the end of the introductory period and save a lot of money that would have been paid for interest.

If the interest rate is not 0%, this calculation becomes a little more difficult, so I created a simple calculator to estimate the payment needed each month in order to payoff the debt by the end of the introductory period.

Method 2: Making Interest off of Credit Card Debt

Method 2 can be used for maximum leverage of credit card introductory offers. The general strategy is to make only the minimum payment on the credit card that is required, while putting the money that you would have paid towards the bill into some money market or certificate of deposit (CD) that will generate a higher rate of return than your credit card is charging you. If the introductory interest rate of your credit card is 0%, and you can find a money market account paying 5%, you are making 5% off of the credit card company’s money! Be careful to keep up with the payoff date when you will need to pull the money out of the investment and payoff the balance of the credit card so you will not be charge any interest fees. Any interest fees will quickly eat up your previous profits. Since this method actually generates cash flow, the interest earned can be applied towards the credit card balance for early payoff.