The Ins and Outs of Balance Transfers

By Derek Hardman
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What is a "Balance Transfer"

Balance transfers have become fairly standard amongst personal credit cards, allowing cardholders to move balances to favorable interest rates and, in some cases, issue checks routed to the credit card number. Balance transfers offer credit cardholders both a negotiation tool with a current credit card issuer to reduce rates, dispute charges, etc., as well as a catalyst for cardholder-friendly competition between credit card companies. Yet, while balance transfers have many positive elements, there are also many risks involved.

Read the Fine Print

You receive a pre-approved offer in the mail for a promotional balance transfer rate. It's 0% for 12 billing statements. You decide to fill it out, transferring a balance of $5,000, which currently accrues interest at 15.99% annually. You fill out the proper information and return it in the postage-paid envelope.

This is a fairly typical story. However, there are a few details that many look over when transferring a balance, including:

Balance Transfer Fees

Unless otherwise stated, all balance transfers have a fee. The industry standard is 3% of the balance with a max of $39. However, many balance transfer offers have no fee cap, making it possible to incur more than a monthly payment's worth of fees on a technically-new account.

Missed/Late Payments on Previous Account

Often, cardholders that accept promotional offers and transfer balances will assume that the transfer will be received as a monthly payment. This is partially true, yes, but only if the transfer is received before the payment due date. As a rule, ALWAYS send a payment to the bank or financial institution you are transferring a balance from. Also, though most major credit card companies do not engage in "Universal Default," unless clearly stated in the terms and conditions, missing a payment to the bank you are transferring a balance from could result in a higher rate from the bank you are transferring it to, despite their being unconnected.

Default Rates

Most promotional rates, purchase and balance transfers, have some serious consequences for late and missed payments. In most cases, even if only a day late, the rate will default to the regular varying APR, thus invalidating the balance transfer itself.

Multiple APRs

If you are transferring a balance onto a credit card with an existing balance, think twice. Unless both rates are the same, payments will always be applied to the lower interest rate, meaning that a balance of $5,000 accruing interest at 15.99% and a transferred balance of $5,000 accruing interest at 0% for 12 billing statements will actually result in a net savings loss if only the minimum monthly payment is paid with each statement. As a rule, NEVER transfer a balance onto a card with an existing balance.

Potentially Harmful to Credit Rating

Unless you are transferring balances more than once a year, doing so will have little impact on your credit rating. However, transferring balances often will most likely signal a pattern of insolvency, which, eventually, will make it very difficult to receive any favorable credit card terms for balance transfers and purchases.

How to Balance Transfer the Right Way

Call

Customer service representatives have far more at their disposal for negotiating terms and conditions than any mail offer ever could. Instead of simply filling out the offer in the mail, call. Often, doing so can result in waived transfer fees and, though less frequent, decreased promotional rates.

Don't Use It

Want to avoid multiple interest rates for balance transfers and purchases? Don't use it. Instead, remove it from your wallet or purse and use it solely to pay down the balance. Other cards could and should be used for purchases.

Think Long-Term

Every now and again, a promotional offer will come in the mail that offers a balance transfer rate that will remain fixed "for the life of the balance." If you ever come upon one of these, take it! 0% might be favorable in the short term, but, with the amount one can accrue in transfer fees from transferring a balance several times, not to mention the potential for credit rating harm, you will likely save less than you would by simply remaining with a fixed-rate balance transfer.

Pay It Down

The balance transfer can last a lifetime--unless you use restraint and discipline and take the necessary steps to pay the balance down. Though credit cards offer individuals freedom and flexibility in the short term, they often restrict and hinder in the long-term. Use balance transfers as a means to long-term solvency and freedom.

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