What Is A Balance Transfer?
First, what exactly is a balance transfer and why would you want to do it?
Like the name implies, a credit card balance transfer is simply transferring one credit card balance to another credit card. It sounds like a bit of a shell game, but there can be some real advantages.
The biggest advantage to a balance transfer is a reduction in the interest rate. Credit card companies will often offer new clients an introductory rate or they might provide current customers with an offer to transfer over other balances. This can save you hundreds of dollars in interest.
Use caution however, because for the credit card companies, this is a way for them to get you to carry a balance, so be careful.
Should You Transfer Your Balance?
You need to do the math in order to determine whether or not a credit card balance transfer is worth it. Some of them sound great until you look at all of the details. Here are some things to consider before you make the move.
Interest Rate
Obviously, the interest rate needs to be lower than what you are currently paying for a balance transfer to be worthwhile. But, just how much lower should it be? Barring the absence of transfer fees, even a couple percent reduction in interest is usually worth your time. If you are carrying 10,000 dollars in debt, a two percent reduction will get 200 dollars a year back in your pocket, using simple math. Luckily, most introductory rates are much better than this, but just as long as the rate is better, it might be a good deal.
Rate Term
Next, take a look at the rate term. If you are only going to see savings for a few months, it might not be worth the trouble. Make sure that the term is long enough so that you see enough savings to justify the time and energy of making the transfer.
Transfer Fees
Finally, look at the transfer fees. While many cards do not charge a fee, some certainly will. This is particularly true for existing cards that extend you an offer to transfer. Most new cards will not have a transfer fee, but be sure to check. If present, they can really bite into your potential savings.
Making The Move
After considering everything that is involved, if you are ready to initiate the transfer of your credit card balances to another account, here is what you need to do.
Gather Your Cards
First, you are going to need to gather up your credit cards and get all of your information in order. Record your credit card balances and the corresponding interest rates. Once this information is in front of you, make a choice as to which card or cards you are going to put in play. If you are limited in how much you can transfer, you can use the card information you record to transfer the costliest balances, the ones with the highest interest rates.
Pick Your Transfer Account
Depending on your credit, you may have several account to choose from. Obviously, you will want to pick the card or cards with the lowest interest rate, but you have to consider other factors as well. How long is the term, are their transfer fees, annual fees and do any of the cards come with rewards? Gather all of this information and then make the smartest choice. Be careful when making a choice, because you would hate to pick an account that saves you 500 dollars a year in interest only to cost you 300 dollars in fees.
Read The Terms
You should do this when you pick your transfer account, but this is worth repeating. Make sure that you read all of the terms of the transfer agreement. Credit card companies are not in the business of losing money, so make sure that your transfer offer actually saves you money and will not end up costing you money in the end. Look at the promo period, introductory rate, future rate, default rate and investigate any potential fees.
Make The Transfer
Now it is time to make the credit card balance transfer. If this is an existing account, this should be as simple as entering in the account number for the card balance you want to transfer. For new accounts, you will generally have to apply for the credit and enter in your transfer card during the application process. Once approved, your new card company will transfer the balance for you.
Make sure that you keep making payments on your old account until the transfer has taken place.
Keep Your Old Cards
The last step is to simply put those old credit cards away. The temptation might be to cancel these cards, but this is usually a mistake. If there is no annual fee on a card, keep it and use it once or twice a year to keep the credit card company from cancelling your account.
By holding on to a credit card, you increase your available credit, decrease your credit utilization and will be holding on to an older account that should be helping your age of credit. Just make sure that you do not charge them back up again.
