Balance Transfer Done Right

Sep 25, 2014 by

credit cardsThis will likely be the very first blog post you’ve read on balance transfers that does not include an affiliate link to a credit card issuer’s balance transfer offer for which the blogger would receive money if you accepted the transfer offer! Enjoy the incentive-free point of view! 🙂

Many people who have too much debt love the balance transfer game. Move your fat balance at 19.99% to a new card with a 0% rate for six months, then pay off the balance within those six months, and voila: you’re a financial genius!

But like many “solutions” to a debt problem (think consolidation loans, payday loans, credit repair, etc.), many well-intentioned people who take advantage end up falling into a very beautifully set trap and actually worsen their debt problem. If you’ve resolved to pay off your credit card debt, there are much better ways to attack the challenge than taking out more or different loans, in my opinion anyway, though some special individuals are smart and disciplined enough to use, say, consolidation loans to help pay off debt.

How to Do a Balance Transfer the Right Way

Making sure you don’t get screwed when you pursue the balance transfer option is going to take some of your time up-front. If you’re unable or unwilling to invest that time, then best to stay away!

Here’s how to do a balance transfer the right way:

  • Read the fine print – The typical balance transfer ‘business model’ is to offer an extremely attractive introductory APR—even 0%—that expires after a specified time period, say six months or a year. Then the rate will jump, maybe to a level higher than the rate on the account your transferring from! Don’t transfer a larger balance than you’re sure you can pay off before the introductory rate expires.
  • Introductory APR probably doesn’t apply to new purchases – One of many clever features of balance transfer offers is that that mega-font size introductory APR does not apply to new purchases you make on the card, as the very fine print that’s hard to locate will reveal. Don’t use a card to which you’ve transferred a balance to make new purchases. Its sole purpose should be to allow you to pay off 100% of the amount transferred with less cash, because of the low APR.
  • One late payment and the deal’s off! – Many balance transfer offers include a provision ending the introductory APR if you make a late payment. After you do a balance transfer, be extra careful to send in payments on time—early is even better!
  • Ask about fees – Balance transfer offers often include a one-time fee, typically 3% of the transferred balance. That can be a significant cost ($300 on a $10,000 balance transfer). You sure want to know about all fees before making a transfer decision, including will the introductory APR be applied to the fee, or will a much higher, ‘new purchase’ APR apply?
  • Consider the affect on your credit score – One factor in computing your credit score is how much available (meaning unused) credit you have. If you transfer a $4,500 balance from an account with a $10,000 credit limit to an account with a $5,000 credit limit, your credit score may take a hit. If you close the first account, you’ll have collapsed your available credit by $5,000 while, initially, your outstanding credit doesn’t change.

What’s Your Experience?

I know many of Money Counselor’s readers have a lot of experience with balance transfers. What are your tips to help assure a credit card balance transfer becomes an aide to paying off debt instead of a trap into even more debt?

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  1. Very good points! We have done the balance transfers both the right way and the wrong way. First, when my husband was handling the finances he used to do this a lot but it eventually got away on him because we were spending more than we were bringing in. Lesson learned. Since I have taken over the finances including creating a budget and tracking to it (most important step), I have used the balance transfers successfully to pay off our truck loan and even to do a large prepayment on our mortgage. We did get caught with a small problem though when an annual automatic charge was put on the card, that we had forgotten about. I probably paid about $20 more in interest than I should have due to that miss, which really irks me, but a lesson also well learned and fair warning you gave above.

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