How to do a balance transfer the right way

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balance transfer

balance transferIf you’re looking to pay down debt, one of the best tools at your disposal is the 0% APR balance transfer. Using the balance transfer strategy, it’s possible to take your high-interest credit balances and get a break on the rate, allowing you to boost your principal payment each month. 

“Many credit card companies offer these low rates anywhere from six to 21 months,” says Andrew Gauthier, the founder of Red Cedar Advisory. There are a number of places to find credit cards offering balance transfer deals, including consumer credit sites like Quizzle. (See what cards may be available to you)

One of the biggest advantages of using a 0% APR balance transfer is that you also don’t have to worry about putting your home on the line. “Unlike a home equity loan, balance transfers generally require no security or collateral,” says Gauthier. “You simply shift your credit card balance to a different company. 

Before you decide to take advantage of a balance transfer, though, it’s important to read the fine print and make sure that the balance transfer will really be the best thing for your finances. 

Watch out for balance transfer fees 

“A typical fee ranges anywhere from three to five percent of the balance transferred,” says Gauthier. He points out that transferring $10,000 will cost you $300 if the fee is on the low end. You need to make sure that your interest savings will be higher than your balance transfer fee before you pull the trigger.

For many consumers, a balance transfer is still worthwhile, even with the fee. After all, if you are paying a high interest rate on your balance, that fee is a small price to pay when you consider the amount of interest you will pay without the 0% APR. Some credit cards offer deals waiving balance transfer fees. Search for these offers and see if you qualify.

Pay attention to the introductory period 

Remember that all balance transfer deals have introductory periods. Your 0% APR isn’t going to last indefinitely. Gauthier points out that most cards offer periods of between six and 12 months. However, it is possible to find cards that offer a 0% APR for up 18 or 21 months.

When transferring a balance, figure out how you can pay down the debt as quickly as possible. Also, run the numbers. If you have a six month introductory period and a balance transfer fee of $300, you might not actually come out ahead. Once the six months is up and the remaining balance is charged at the “regular” rate, you could find yourself in trouble, especially if your new card has a higher regular rate than your old card.

Another problem to watch out for are the cards that charge retroactive interest. This means that if your balance isn’t paid off during the introductory period, all of the interest you didn’t pay during the promo period will be added to your total. Read the fine print to make sure you aren’t going to be charged interest in this way.

Before you transfer your balances, create a plan for paying down as much debt as possible. It’s vital to take advantage of the lower interest rate while you can so that your entire payment goes toward reducing your debt.

What about purchase APRs?

Gauthier also warns that purchase APRs might be higher than your balance transfer APR. If you use the card to buy new items, you could be charged a higher rate. This can slow the process down. Before you transfer a balance, you should be committed to spending money you already have, rather than getting involved with further debt spending.

Avoid making your debt situation worse 

“Credit card balance transfers aren’t magic bullets to eliminate debt and credit card balances,” Gauthier points out. “You, as the debtor, need to be diligent in paying down the balance on the new card. If you simply delay paying interest, you are not accomplishing anything.”

It’s also important to understand the importance of changing your habits. Many consumers transfer balances to new cards, only to run up new debt on their old cards. Now, instead of being in a better financial situation, you are stuck with more debt than you had before. Viewing debt as a symptom of a wider financial problem can help you tackle the root of the issue. Only when you stop debt spending and have a plan in place to avoid overrunning your income each month can you truly make progress with your debt pay down plan. Without that change, balance transfers aren’t helpful.

“Credit cards can be wonderful tools to use in your financial life, but they need to be handled with caution,” says Gauthier. “If you do your homework and remain diligent, you can leverage these tools effectively. If not, you will always pay the piper in the end.”