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Making a Credit Card Balance Transfer

What's more attractive than a 0% balance transfer deal? It seems like credit card issuers are always raising interest rates, so it can be hard to pass up the opportunity to pay off your balance interest-free. Before you accept a balance transfer offer, make sure you understand a balance transfers and know whether you'll really save money by moving your balances.

What is a balance transfer?

A credit card balance transfer is the process of moving one credit card balance to another. You can move an entire credit card balance or just part of one. People often transfer balances because they want to take advantage of the newer credit card that happens to have a lower interest rate or other fees.

The most attractive balance transfer offers are typically made to people with very good credit scores. These people with credit scores in the 700s and 800s often receive balance transfer offers for 5% interest rate or less.

The low interest rate balance transfer won't last forever. These promotional rates typically expire anywhere from three months to a year. Starting February 22, 2010, any promotional interest rate must last at least six months.

Once the promotional balance transfer interest rate expires, the interest rate on the balance transfer will go up to the regular transfer rate. That rate will probably be significantly higher than the promotional rate. The regular average balance transfer interest rate is around 13%.

The Cost of a Balance Transfer

Balance transfers are not without their costs. When you make a balance transfer, you'll be charged a balance transfer fee. It could be a flat fee or a percent of the amount you transfer. Watch out for the balance transfer fee. It could be so high that it negates any interest savings you receive.

If you're wondering whether you'll save money with a balance transfer, plug your numbers into a balance transfer calculator like the one from CreditCards.com. The calculator may reveal that the balance transfer deal isn't going to save money after all.

Make the most of a credit card balance transfer.

To take full advantage of a balance transfer deal, you should pay off all (or at least most) of your transferred balance during the promotional period. That way you're not stuck paying off the balance at a much higher interest rate.

When you transfer a balance to a credit card, don't make any charges on the credit card until the balance transfer has been completely repaid. For now, any payment over the minimum goes toward the balance with the lowest interest rate. If your purchases APR is higher than your balance transfer APR (after the promotional rate expires) that means your payments will go toward paying off your purchase while the balance transfer continues to accrue interest at the higher interest rate.

Note that after February 22, 2010, credit card issuers won't be able to apply payments this way anymore. Instead, they're required to put any payment over the minimum toward the balance with the highest interest rate. That's a little better. However, you still have a balance that's accruing interest and not being paid off.