Before you Transfer: Tips for Making the Most of a Balance Transfer

A balance transfer – especially a balance transfer with a 0% introductory interest rate – can seem pretty tempting, especially if you’re feeling overwhelmed by mounds of high-interest credit card debt.  But are balance transfers worth it?  Will that 0% interest rate really save you money over the long haul?

A typical balance transfer offer allows you to move some (or all) of your credit card debt to a new card – usually with a super-low or even 0% introductory interest rate that can last anywhere from 6 to 18 months.

A balance transfer can be helpful if you’re trying to pay down a card with a hefty balance.  After all, during your introductory period, there’s less money going to interest and more money going toward paying off your balance.  But, if you’re not careful, a balance transfer can also open the door to more debt and higher payments.  Is a balance transfer right for you?  That depends.

Here are a few ways to get the most out of a balance transfer:

• Read the terms and fine print.  Make sure you know when your introductory interest period ends (and how much you’ll be paying when the intro period is over).  Also, make sure you understand how the introductory interest rate works:  In some cases, the 0% interest rate only applies to the balance transfer – not to purchases made with the new card.

• Do the math.  Most credit card companies charge you some sort of “balance transfer fee.”  The fee varies, but you can expect to pay about three to five percent of your total balance transfer.  In some cases, the money you save on that low introductory rate can be canceled out by the transfer fee.  Before you sign up for a balance transfer, make sure you’re actually saving money on the deal.

• Have a plan to pay off your balance — fast.  Credit card companies aren’t offering balance transfers to be nice – they’re offing them because they’re counting on you sticking around long after that low introductory interest rate expires.  Once that happens, you’re paying them interest.  The only way to “win” when it comes to balance transfers is to pay off all (or almost all) – of your transfer before the introductory rate goes away.  If you can’t do that, a balance transfer might not be worth the trouble.

• Don’t cancel your other card(s).  Let’s say you transfer your entire $2,000 balance from a high-interest card to a new card with a 0% introductory interest rate.  But even though you’re now carrying a $0 balance on the old card, don’t cancel it.  Your credit score is partially determined by your ratio of available credit to credit used – the more available, unused credit you have, the better.  But remember, the key word is “unused” – which leads us to the next tip . . .

• Don’t rack up new debt.  Unused credit can be tempting – and if you’re struggling with maxed-out credit card debt, the last thing you want to do is add to your balance.  If you’re worried about your willpower, make it hard to use your old card(s) – cut them up, lock them in a desk drawer – whatever it takes to ensure that you don’t end up deeper in debt.  A balance transfer is supposed to help you get rid of old debt, not create new debt.

• Shop around, and apply with caution.  Before you apply for a balance transfer, take some time to compare offers from several credit card companies:   Compare balance transfer fees, introductory interest rates, and terms and conditions.  Apply to the one that seems like the best fit for you – and wait to hear back before you apply for another one.  Too many credit card applications and credit inquiries can ding your credit score.

When used responsibly and paid off quickly, a balance transfer can be a great way to take a big bite out of your outstanding balance.  Just make sure you don’t use them as an excuse to rack up more debt – you’ll hurt your credit score and your finances.