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Balance Transfers 101

The concept of a credit card balance transfer seems simple enough, but there are a number of steps involved that are critical to successfully moving money owed from a high interest credit card to one that offers a lower annual percentage rate.

It used to be that 0 percent balance transfer offers were common. However, those once-ubiquitous deals may be phased out. Credit card regulation reforms passed in December 2008 are likely to make credit more expensive for everyone, thus making issuers less likely to offer such deals. Still, regardless of whether the rate is 0 percent or something a bit higher, it's important to do your homework before doing a balance transfer.

First, consider your current credit situation. This is especially important now, given issuers' and lenders' tightening of credit in the struggling economy. Is your credit history solid, with a consistent pattern of on-time credit card payments and a reasonable number of open credit lines? If so, you may qualify for a lower interest credit card onto which you can move some or all of your outstanding balances. This can end up saving you thousands of dollars a year in interest charges. With consistent discipline, a large credit card balance can then be paid down to zero if you take advantage of the 0 percent APR and apply all that money that would have been paid on interest to the principal.

A second important thing to consider is the amount you wish to transfer. If you have $20,000 in outstanding balances on several high interest rate credit cards, it is highly unlikely you will be able to move all of this onto a single low-rate balance transfer credit card. If only a portion (say $5,000) is allowed to be transferred, this is better than nothing and can be a productive step in the direction of lowering your overall interest costs. Many borrowers take an all or nothing approach, but this can be self-defeating behavior. Just like weight, personal debt gain doesn't happen overnight and, conversely, doesn't go away overnight, either. It's important to make a decision to change and then start moving consistently in the direction of change.

Another thing to consider when transferring balances is determining the fee that may be charged by the issuer to complete the process. Balance transfer fees are almost a given unless it is stated up front that no fees apply. An example of a fee is 3 percent of the transferred amount up to a certain capped dollar amount; however, recently credit card issuers have been eliminating the cap. When reading the fine print, be sure to note whether this is the case.

The option to transfer balances from a high rate credit card to one offering a lower APR -- or even 0 percent if you qualify -- for several months or longer can be a smart financial move. But like many aspects of personal finance, discipline is required to dig yourself out of debt. It's a great opportunity that can be leveraged to pay off principal, or it can lull a person into thinking they have the freedom to add more debt, since their required payments have been suspended for a time. If at all possible, put yourself in the first category so you can start to see the light at the end of the tunnel and be debt free before the introductory period ends.