Credit Card Balance Transfers
A balance transfer is when you take one or more outstanding credit card balances and transfer them to a different credit card, preferably at a lower interest rate. The point is to get your debt into an account with a lower interest rate and better terms so you can save some money in the long run. Some cardholders like balance transfers because they allow them to consolidate their date, making their personal finances just a little bit easier to manage.
Balance transfers can be a great idea if you have a few credit card balances you want to pay off with a lower interest card, but only if a few things apply:
You’re going to close the paid off accounts. A balance transfer is just like a debt consolidation loan in the sense that it’s designed to pay off other accounts…not to bring the balances down so you can go on a shopping spree. The only way a balance transfer will be an effective personal finance tactic is if you close the accounts after you pay them off. If you keep them open you run the risk of using them again and winding up with an even larger cumulative balance than you started with.
Interest rate isn’t the only factor. While you want to make sure that the interest rate of the new credit card is lower than the interest rates of the balances you’re transferring, there are also other factors to take into consideration. Don’t transfer balances from cards that don’t have a lot of fees to a card that has a slightly lower interest rate but a ton of fees. It just doesn’t make sense.
Keep making payments until your balances are zero. Balance transfers don’t happen in the blink of an eye, so you can’t just assume that your balances have been paid off. Keep checking your statement and making payments each cycle until you see that zero balance, otherwise you’re going to wind up with some hefty fees.
Make sure the balance transfer doesn’t cost money. Most reputable credit card companies don’t charge a thing for balance transfers, but make sure that you aren’t signing up for a balance transfer that will cost you money. You should also make sure to fully understand the interest rates associated with the balance transfer. Oftentimes the interest rate for balance transfers is an introductory rate and expires eventually into a higher rate.
Should you do a balance transfer? If it’s going to save you money then it can be a great idea. Try not to make it a perpetual process, however. In other words, don’t make a practice of racking up debt, sending it to a balance transfer, and then starting all over again. This isn’t a good idea for your personal finance situation unless you’re intentionally setting out to be a cash cow for the credit card companies.
