Start Saving Money: Balance Transfers

By • Aug 18th, 2007 • Category: Financial

Credit Card PaymentsIf you are one of the millions of Americans that has accumulated credit card debt, and have made the decision to start paying off your card(s) now, then perhaps you might benefit from a credit card balance transfer.

Essentially, the reasons balance transfers are useful are because they can be used to move a balance from a high interest credit card to a lower interest card, and can combine credit card balances to allow you to have fewer payments each month.

I am bringing up balance transfers because I recently spoke with a few of my acquaintances about them, and because Laura and I got one earlier this summer.

In June I decided to do a balance transfer because I found an excellent deal that would save me approximately $1200 in finance charges over the course of repaying the debt, and made it so I would have the card paid off in 2 years rather than 9.

The first acquaintance of mine decided to get a balance transfer because he made the mistake of sending his card over the limit, which switched the interest rate over to the bank’s hellishly high penalty rate. Prior to his bank’s 33% penalty APR, he had a 15.99% variable APR that had just increased to 23.99%.

My other acquaintance (sorry, I am trying to make a habit of not mentioning names or how I know them) had several store brand credit cards she wanted to pay off. These cards usually have low introductory rates that switch to 21-23% variable APRs after 3 to 6 months. Her issue was keeping track of which cards needed to be paid and when, but transferring the balance to a lower APR card will also save her money throughout repayment.

If you have had a credit card before, chances are you probably receive plenty of mail offering 0.00% APR on balance transfers (Citibank seems to send me these all the time). Offers such as these have their benefits, but you should read the fine print because they typically have an introductory period and switch to a higher APR later on. Unless you plan on paying off the card before the introductory period expires, and are able to, I would not recommend these offers. Instead check out Bankrate.com to find out which credit card is best for you.

Some credit cards have an introductory period and switch to variable rates when it expires, while others charge fees to transfer the balance (usually a dollar amount per card or a percentage of the total transfer). Others have annual fees or change the interest rate if you use the card to make purchases.

To find out if you would benefit from a balance transfer:

Some important things you should keep in mind once you have made a balance transfer:

  • You need to continue making the minimum payment on each of the cards you transfer until the entire balance has been transferred
  • Applying for and opening a new credit card will affect your credit score, as will closing a card you have had for a while
  • And, unless your balance transfer APR applies to new purchases as well, you DO NOT want to make purchases using your new card

If you do not feel comfortable opening a new credit card or have your application denied you can always call your bank and ask them to lower your APR. More on that tomorrow.

Photo: lemonjenny


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