Balance Transfer Game: What You Should Know

Balance transfers are becoming an increasingly popular way to reign in high interest rates. However, reducing outstanding debt is not always as easy as switching cards. We've put together ground rules every consumer should know before they consider a balance transfer.

Infographics: Balance Transfer Game © CreditDonkey

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A balance transfer from a credit card with a high interest rate to one with a lower interest rate might be the right solution for you. However, it only benefits you if use balance transfers to limit or stop interest accruals while you actually pay off your debt. Otherwise, when the introductory period ends, you'll find yourself in the same boat all over again.

With 42.3% of American families in credit card debt, outstanding revolving credit card debt at $793.4 billion and the nationwide credit card APRs averaging 13.08%, according to the U.S. Federal Reserve, January is a hot time for card issuers to lure people from their current cards with promotional interest rates as low as zero.

“Balance transfers are a smart financial choice for many consumers, provided they read the agreement’s fine print and are able to pay down their balances before the low introductory rate offers expire,” says Charles Tran, founder of CreditDonkey. “In most cases, balance transfers represent an interest-free loan during the introductory period, but if consumers use that relief to simply continue uncontrolled spending, they will easily get deeper in debt.”

Before making a balance transfer, consumers should follow these five tips:

1. Know the Interest Rates: Review the card’s terms and conditions to learn if you will be charged a balance transfer fee. Fees typically range from 3% to 5% of the total balance. Check the length of introductory period and find out the post-introductory-period APR. If you cannot pay off the balance before this expires, your new card might become more costly than the old one.

2. Don’t Take Teaser Rates at Face Value: Determine if the low- or no-interest rate promotion also applies to new purchases. Some companies charge their usual rates on purchases.

3. Know Your Fees: Understand the different fees—balance transfer fees, annual fees, and minimum finance changes. As a result of the new regulations from the Credit CARD Act, credit card companies have raised or added new fees.

4. Be Aware of Changes: Remember that the terms of the credit card can change over time so consumers should stay current on the newest changes.

5. Read Reviews Before Transferring: Today it is easy, and equally important, to compare reviews and benefits of the cards so you can be sure the new card is the right fit for you.

“Until recently, many 0% interest credit cards were limited to short periods such as 12 months,” says Tran, “but now credit card issuers are offering big incentives such as 0% for 21 months to try to get consumers to transfer their balance."

Balance transfers are more appropriate for consumers who can pay off the balance before the introductory period ends, control their spending, and those with a good credit score who can secure a better post-introductory interest rate. If a consumer does not meet these criteria, they should think twice before they enter the balance transfer game.

Here are five strategies to help stay ahead:

• Don’t be Late: Pay your bills on time to avoid late fees and penalties that can increase the interest rate.

• Pay Down the Balance: Just paying the minimum payment will not resolve your debt problem.

• Separate Your Debts: If you cannot get a low interest credit card on all transactions—such as purchases, balance transfers and cash advances, use separate cards with the most favorable terms for different transactions.

• Make it a Good Ending: A month or two before the introductory period ends, make plans so you are not stuck with a high interest rate you cannot afford. Decide if you should keep this card and the new high rate or begin a new balance transfer.

• Know Your Rights: For other consumer benefits of the new Credit Card Accountability Responsibility and Disclosure Act, visit http://www.federalreserve.gov/consumerinfo/wyntk_credicardrules.htm

“If you ‘play your cards right,’ balance transfers can save you money and consolidate your debt,” says Tran, “but consumers should understand that using them too often can result in a lowered credit score.”

(Research/Writing by Kelly; Graphic Design by Marcelo; Additional Writing by Susan)

Write to Kelly Teh at kelly@creditdonkey.com

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