Balance Transfers 101

The concept of a balance transfer seems simple enough, but there are a number of steps involved that are critical to successfully moving money owed from a high interest credit card to one that offers 0% APR, or at least a lower interest rate. First and foremost, consider your current credit situation. Is your credit history solid, with a consistent pattern of on-time credit card payments and a reasonable number of open credit lines? If so, you may very well qualify for a lower interest credit card onto which you can move some or all of your outstanding balances. And, this can end up saving you thousands of dollars a year in interest charges. With consistent discipline a large credit card balance can then be paid down to zero if you take advantage of the 0% APR and apply all that money that would have been paid on interest to the principal.

A second important thing to consider is the amount you wish to transfer. If you have $20,000 in outstanding balances on several high interest rate credit cards, it is highly unlikely that you will be able to move all of this onto a single low rate balance transfer credit card. If only a portion, say $5,000 is allowed to be transferred, this is better than nothing and can be a productive step in the direction of lowering your overall interest costs. Many borrowers take an all or nothing approach, but this can be self-defeating behavior. Just like weight gain, personal debt doesn’t happen overnight and, conversely, doesn’t go away overnight either. It’s important to make a decision to change and then start moving consistently in the direction of change.

Another thing to consider when transferring balances is determining the fee that may be charged by the issuer to complete the process. Balance transfer fees are almost a given, unless it is stated up front that no fees apply. The standard balance transfer fee is 3% of the mount transferred. While this may not sound like too much initially, if you’re transferring a large balance, it can be significant. Many banks cap the transfer fee at $50 or $75 in order to avoid discouraging those who wish to transfer large balances.

The option to transfer balances from a high rate credit card to one offering 0% APR for 12 months or longer can be a smart financial move. But, like many things involving finance, discipline is required to dig yourself out of debt. It’s a great opportunity that can be leveraged to pay off principal, or it can lull a person into thinking they have the freedom to add more debt, since their required payments have been suspended for a time. If at all possible, put yourself in the first category so you can start to see the light at the end of the tunnel and be debt free before the 0% interest period ends.

Published: 3/15/2007

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXPO.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.

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