Balance Transfers Guide: How to Make The Most of Balance Transfers

In a society encumbered by excessive debt, balance transfers have become a common tool to manage and help eliminate debt. The basic concept is to transfer your balance from a higher interest rate loan or credit card to another institution offering a lower interest rate. Because you pay less interest on your debt, more of your payments go towards the principle allowing you to pay off your debt faster. It is most common to find these opportunities with different credit card companies.

In this hub I will provide you an understanding of the value of a balance transfer, what you need to watch carefully when taking advantage of a balance transfer and how to responsibly make the most of your balance transfers to manage and possibly eliminate your credit card debt.  Keep in mind constantly transferring your balance won't make your debt go away.  It's often best to consolidate it into one place with low interest where you can start paying it off.

Put simply, the primary benefit of any balance transfer is to reduce your interest rate on a specific amount of debt. The average American family pays more than $1000 a year on credit card interest. This means they're paying an extra $1000 on top of the actual expense of the items they've purchased. The key to a successful balance transfer is to obtain a lower interest rate without being charged transfer fees or other finance charges.

Often times you can find a 0 percent balance transfer or 0 APR balance transfers, which means for a short period of time (usually 3 to 6 months) you can hold that balance on a new card without being charged any interest whatsoever. This can provide an excellent opportunity to pay down your debt, instead of watching it grow each month because of the interest and finance charges. Just be careful not to let the new credit card company slip in some obscure additional charges to make up for the profit they lose by not charging you interest.

Additional reasons for MasterCard or Visa balance transfers include closing a credit card with a company that provided poor service or consolidating multiple credit cards to just a few cards to simplify your budget and help your credit score.

Don't just look at the lower interest rate or APR and measure the cost of the balance transfer with that single variable. Remember that a bank or credit card company is in the business of making money, so you will often see them compensate a low charge or interest rate in one areas with a sneaky extra charge or greater expense in another area.

For example, you might find an offer with an incredibly low APR, but then you read the fine print and realize to obtain the low APR you have to agree to an exorbitant annual fee. Another way they try to get you is by charging you an enormous interest rate on your non-transferred balance. What this means is that you pay the low interest rate on the debt you transferred from the old credit card, but you pay a much higher interest rate on any new charges you make on this new card.

Unfortunately, many people don't realize how common a practice this happens to be among credit card companies, so they're confused when they see the accumulating interest charges on their account.

This isn't to imply that a balance transfer is just an opportunity for credit cards to sneak a charge on you. It can be an excellent way to handle your debt.  It is a little like how the people behind the P90X make some extra money selling you equipment for the workout.  Just because they make some extra money that way doesn't mean there isn't any truth to all the glowing P90X reviews referred to in my P90X article. But you just need to make sure you understand all the charges and fees involved when you transfer your balance from one institution to the other. Credit balance transfers can be great opportunities, but credit card balance transfers can also be a traps, so always read the fine print!

Here are some simple steps to help you steer clear of balance transfer problems and make the most of your situation.

Determine how long you will have the lower interest rate on the balance transfer. At that point, how much will the interest rate be raised? Try to manage your budget so that you can pay as much of the debt off as possible within that period. If the interest rate after the balance transfer rate is too high and you still have tons of debt, consider doing yet another balance transfer before the end of the low interest rate period.

Identify and understand all applicable transfer fees. They won't always be called "transfer fees" so make sure you gain an understanding of every fee charged to you for the conducting the transfer of debt from one account to the other.

Watch for the dreaded tactic of allowing payments only to be made toward the balance transfer and not any charges made to the account. This is fine if you don't use the new credit card for new charges, but if you do use it during the lower interest transfer period they may apply all your payments toward your transferred balance while not paying off any of the new charges. Then those new charges sit on your account accruing interest at a much higher rate.

If at all possible, look for 0 percent balance transfers with little to no transfer fees. Be careful with these as they are most likely to feature hidden fees, but if you plan to responsibly pay off the debt without making any more charges these 0% balance transfers are the way to go. These are sometimes referred to as "0 balance transfers" although the title sounds odd. Also, so-called 0 APR credit cards always refer to the introductory offer, so don't think someone will simply give you a means of accruing debt without any finance charges.

If you are committed to paying your bills on time and eliminating your debt within the grace period provided by the balance transfer, this is an excellent way to manager your debt.  But if you're just delaying the inevitable, you're only making your life more complicated.  Balance transfers are great for tackling and eliminating excessive debt, but they only complicate matters if you're just juggling your debt without any plan or intention to eliminate it.