credit card balance transfer

What’s the Big Deal about a Credit Card Balance Transfer?


by

23 May,2012

Chances are that you have heard about balance transfers. You can move your balance from one credit card to another. But what’s the big deal? Why would someone choose to move their credit card balance? A credit card balance transfer is a big deal because it can save you a lot of money in interest charges.

Saving with a Credit Card Balance Transfer

With a credit card balance transfer, the goal isn’t necessarily to maximize cash back rewards, although that can be a bonus that comes with moving to a different card. Instead, the balance transfer is strictly about saving money on interest as you pay down your credit card debt.

A balance transfer allows you to get rid of the high interest you are paying on your credit card debt — at least temporarily. When you have a balance on a high interest credit card, and if you only pay the minimum, you could spend years trying to repay your credit card loan. Most of your payment goes to interest, and doesn’t reduce your principal. This can result in spending 10 years repaying the loan, and often paying more in interest than you originally borrowed to begin with.

Balance transfers alleviate some of these issues. Instead of paying 15.99% interest, you pay 3.99%, 1.99%, or even 0% interest. Instead of a large portion of your payment going toward interest, most of your payment goes to principal reduction. If you have a 0% balance transfer, your entire payment directly reduces your debt. You can save potentially hundreds of dollars when you use a balance transfer — especially if you make a plan to pay off the credit card debt before the intro period ends.

Avoid the Pitfalls of Balance Transfers

It’s important to avoid the pitfalls of balance transfers, though. First of all, you have to realize that your introductory rate is just that — introductory. Be aware of when the intro period ends, and what rate you will have to pay at that point. Also, be aware that, even after the passage of the Credit CARD Act of 2009, your intro period can disappear without notice if you miss a payment or go over your limit.

Also, check the balance transfer fee. Some cards don’t charge a fee if you transfer a balance within the first couple of months of being approved for the credit card. Most cards, though, charge a balance transfer fee that amounts to 3% or 5% of your balance. In some cases, the fee will offset your interest savings, especially if the intro period is fairly short, and you have a large balance. In most cases, though, you are likely to save — even with a balance transfer fee.

If you want to use a balance transfer to best effect, you should plan to pay off as much of the debt as possible during the introductory period. Even if you can’t pay it all back during the intro period, a balance transfer can provide you with a way to get a good start, and demolish a large amount of debt at once.