Are Balance Transfers a Good Deal?

It's an offer that sounds almost too good to be true: you can eliminate or drastically reduce the interest you pay on your current credit cards simply by transferring your balances to a new credit card. The new card company will charge you no interest or a much lower rate of interest than you pay on your current credit card for a certain period of time, like six months or a year.

But before you sign up for a balance transfer offer, make sure you understand what you're getting into. Transferring your credit card debt can be a good move if you're serious about paying that debt off before the low interest rate period expires. More of your payments will go towards reducing debt.

But you could end up even deeper in the hole if you're not careful about how you use the new credit card. There are often fees associated with the transfer that can make the deal less attractive, and when the low-interest period expires, you may end up paying a higher interest rate than you paid on your old card.

Balance transfer offers from various credit card companies can look very similar. If you check our site for example, you'll find balance transfer offers from Citi® credit cards, Capital One® credit cards, Discover® credit cards and Chase credit cards that all offer 12 months of a 0% APR and no annual fee.

But there are differences and disclaimers in all the offers, and you need to read the applications from each company carefully to find out what they are. Check out:

• Balance transfer fees. Usually you'll pay a fee of between 3 and 5 percent on the amount that you're transferring to the new card. Many companies will cap the amount you have to pay at around $50 or $75, but that's not always the case, and some transfer fees can be much higher.
• Actual interest rates. Many balance transfer offers will advertise a 0 percent interest rate, but that offer may be good only for applicants with excellent credit ratings. Unfortunately, you won't learn the exact rate of interest you'll be charged until after you go through the application process and are accepted.
• What you'll be charged on new purchases. The low interest rate may only apply to the amount you transfer, and you may end up paying a much higher rate on any new purchases.
• Length of time for the low interest rate. Although 12 months seems to be a fairly standard low-interest period, some cards may have shorter (or longer) periods.

It's a good idea to wait until you know exactly what interest rate you'll be paying before you move your credit card debt to a new card. You may not save as much as you had hoped if the interest rate isn't that much lower than your current card, especially if you add in the transfer fees. Since it can take some time for the transfer paperwork to go through, make sure that you keep up payments on your old card until you get a statement showing no payment is due.

Balance transfers may also have an impact on your credit rating -- and not always a good one. Credit rating companies are happiest when you keep your debt to ratio limit low -- that is, when you don't spend so much that you're close to the limits of your card. To maintain the best credit score, you'll want to keep your outstanding balance on any card under 35 percent of your card limit. You could actually lose points on your credit score if you consolidate debt from several cards on the one new card and go over that 35 percent debt to ratio limit.

Despite some of the drawbacks, balance transfers can be a good way to rid yourself of unwanted debt and get in better financial shape if you use them in the right way. For the best results, transfer your old debt to the new card, then put it away without using it and focus on paying off what you owe.