Day 7 – Take Advantage Of Balance Transfers

I thought very hard before deciding to make this post because I didn’t want it to come across the wrong way. This post is specially only for people who have credit card debt and are currently in the process of paying it off. If you do not have credit card debt please skip this article as it is not for you.

I am a big believer in taking advantage of credit card sign up bonus offers (If you do it right). One of the big things that credit card companies offer is 0% balance transfers for x amount of time. A balance transfer is the process of transferring your debt from one credit card to another. This process is usually done to save on interest payments each month.

You can only transfer an amount up to your credit limit on the new card. So if your credit limit is $5,000 on the new card and you want to transfer a balance of $6,000, you will only be able to transfer up to $5,000 (including any balance transfer fee) of that existing balance.

Here are the nine things you need to know before you make the big switch to a balance transfer credit card.

1. Transferring isn’t the same as repaying

When you use a balance transfer card, you are, in essence, paying off credit card “A” with new credit card “B.” For example, if you’ve been paying 13 percent interest on a $2,000 debt, you’d have to make a $347 monthly payment for six months to pay off the debt. Transfer that $2,000 to a 0 percent card and your payments will be $334, saving $77 in interest in the process. “The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate.

2. Consolidating simplifies payments

Another reason to transfer balances to a single low-interest credit card is to simplify your financial life. If you’ve maxed out multiple credit cards, can’t keep payment dates and minimum payments straight and often accrue late fees, putting all your credit card debt on one card may be a good move. You’ll have just one card to keep track of and one payment to make each month.

3. You may transfer other debts, not just credit cards

It’s not just balances from other credit cards that can be transferred. You may be able to move loans for cars, appliances, furniture and other monthly installment payments to a no-interest balance transfer credit card, using checks from the bank that issues the credit card.

4. Fees are inevitable

It isn’t quite as simple as making a swap from a high interest rate to a low interest rate anymore. You will almost always be charged a balance transfer fee, which is determined as a percentage of the total amount you’re transferring. In the past, transfer fees were capped. Today, on most balance transfer cards, there is no cap, so the more you transfer, the bigger the fee. According to research, the most-typical balance transfer fee is 3 percent, so if you transfer a $10,000 debt from another card, you’ll pay a $300 fee right away. Even if you have the cash to do so, it might or might not be worth it, depending on how much money you’ll save on interest over the life of your debt. See if it makes sense for you by using a balance transfer calculator.

5. Transfer rates expire

A balance transfer card woos you with an extra-low annual percentage rate (APR) between 0 percent and 5 percent. That teaser rate, however, doesn’t last forever. After a set period — often a six months to a year, occasionally more, the interest rate will increase, probably to somewhere in the range of 12 percent to 18 percent — perhaps even worse than the interest rate you were trying to get away from. Make a misstep, such as letting payments lag, and your great rate will disappear and in its place will appear the higher “go-to” rate. So make sure to look at your current APR on your credit cards with debt on them first.

6. Careful with new purchases

Just because the balance you transferred to the new card gets a free pass with perhaps a 0 percent interest rate right now doesn’t mean new purchases on the card will be interest-free too. Some balance transfer credit cards’ rules specify that only transferred balances qualify for the lower rate, while new purchases collect interest at the regular, higher APR. Some cards do apply the introductory interest rate to new purchases too, but often only for the first six months. Remember the whole point of this strategy is to SAVE money on repaying your existing credit card debt.

7. Learn how payments are allocated

To make matters more complicated, you can’t tell your card issuer how to apply your payments if you have both a 0 percent balance transfer balance and a new purchase balance at a higher rate on the same card. According to the Credit CARD Act of 2009, issuers are required to apply any amount in excess of the minimum payment to the debt with the highest interest first. Most issuers will apply your total minimum amount payment to the lowest interest debt first, which will draw out the repayment time (and interest charges) on the higher interest debt. Because of this, it may be best to avoid using a balance transfer card for any new purchases to avoid dual-interest-rate balances.

8. Repeat transfer? Don’t bet on it

You may think applying for a new balance transfer card when your teaser rate expires is the perfect solution to avoid ever paying interest on your credit card debt. Moves like that can damage your overall credit score. When you continue to open new low-interest accounts, but maintain high debt levels, lenders may see you as a risk, which will make it hard for you to borrow money for big-ticket items such as a home or car. Again use this strategy only when you get into the mindset of waiting to pay off all your credit card debt.

9. Good credit required to qualify

Zero interest balance transfer cards were widely available before the recession, but became rarer and less generous during it. They’re now common again, but the best terms are available only to those with good or excellent credit. If you can qualify, and if it’ll save you significant cash or help you pay off your debt sooner, it might be the way to go.

How do I complete a balance transfer ?

Step 1) When you respond to a balance transfer offer, you’ll indicate who you want to pay, the account numbers, and how much you want to transfer.

Step 2) Once you’re approved for the balance transfer, the credit card company contacts your creditors or billers on your behalf and pays them the amount you indicated. It can take up to two weeks for this process.

Step 3) If you have any payments due before that time, you’ll want to go ahead and make those payments by their due dates to avoid late fees.

What else should I consider before accepting a balance transfer offer?

1) Avoid “chasing” 0% balance transfer offers or bouncing balances from one card to another. Consider finding a great balance transfer offer and making a plan to pay down the debt once and for all.

2) Determine whether the Intro APR offer applies only to the balance transfers, regular purchases, or both. Check to see if there is an introductory balance transfer fee as well.

3) Balance transfers by themselves do not automatically close an account. If you want to close a credit card account after you transfer the balance from it,  you need to contact the creditor to do so.

Make sure to check out the list of the best balance transfer cards, and for a second opinion, The Simple Dollar’s ranking of balance transfer credit cards.

“Never spend your money before you have earned it.”
– Thomas Jefferson –

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