Rules On Balance Transfers

Credit card balance transfers can be the perfect tool for consolidating debt or organizing finances. If used properly, they can save thousands of dollars in additional interest while simplifying monthly credit card payments. However, balance transfers are not a panacea curing all financial ills for consumers. Before conducting a balance transfer, it is important to understand the rules to receive the most benefit with the least amount of risk or making matters worse.

Why Use Balance Transfers?

The most common use for balance transfers is to consolidate multiple high interest rate credit cards into a single monthly payment with a low interest rate. Most consumers carry on average between five and six credit cards at varying interest rates and balances. Credit card companies will offer balance transfer opportunities where fees are waived and a temporary low interest rate is offered for 12 to 18 months. The credit card company's goal is to have consumers transfer their balances then make additional charges and never move the balance. When the low interest rate period is over, the consumer now has their existing transferred balance plus additional purchases at the now higher interest rate. This is where they make their money but that doesn't mean consumers can't protect themselves.

Temporary Interest Rate

Most temporary balance transfer interest rate offers last a minimum of 12 months and a maximum of 24 months. These time periods will have corresponding interest rates of between 0% and 2.9%. When using a balance transfer check, take note of when the low interest rate period is over and plan on moving the balance at that point in time. There is nothing that prevents consumers from taking advantage of a low temporary interest rate on a credit card balance transfer and then moving it again in the future. This gives consumers an opportunity to save hundreds of thousands of dollars in interest and then move the balance to another credit card with another low temporary interest rate.

Balance Transfer Fees

If balance transfers were only as simple as cutting a check or making a call and benefiting from the wonderful world of 0% interest rates. Unfortunately there is always a catch and in this case it is normally a balance transfer fee. Depending on the bank or credit union, sometimes these fees will be waived but large national banks consistently charge 4% on the amount transferred when using balance transfer checks. Keep this in mind because a $10,000 balance will immediately incur a charge of $400 which over 12 months is an annual interest rate of 4% and not 0%. If the balance transfer is for 18 months at 2.9% then the total interest rate if held for the same 12 month period would be almost 7%. This is almost as much as most standard credit card interest rates with no special promotions.

Seriously, What's the Catch?

There is one important consideration when using balance transfers. The main problem with balance transfers is not addressing the underlying behavioral issues which most consumers embrace all too often. Excess consumption, compulsive buying, emotional problems, poor judgment and a lackadaisical attitude often mean repeating mistakes of the past. It's great to consolidate multiple high-interest rate credit card balances into a single low monthly payment because it allows consumers to pay off existing debt while saving thousands in interest. It's all for naught however if the credit cards with no balance are run up again adding to the problem. Balance transfers can become a crutch for some consumers. They wind up juggling credit card balances when they can no longer make minimum monthly payments. If you understand the rules on balance transfers and use them responsibly they can be an invaluable tool when getting out of debt while saving money on interest.