Basics of Credit Card Balance Transfers


You see “zero percent interest” and your eyes light up — what could it hurt to consolidate the balances of your debt onto one credit account with zero percent interest? Seems perfect, right? Not always.

Who Should Do It (and who is able to)

Contrary to what it may seem, and what some may hope, a credit transfer does not necessarily eliminate your debt woes. In fact, according to Bankrate.com finance writer Janna Herron, those zero percent credit transfer offers are typically designed for and given to those who already have good to excellent credit.

You see “zero percent interest” and your eyes light up — what could it hurt to consolidate the balances of your debt onto one credit account with zero percent interest? Seems perfect, right? Not always.“Balance transfer cards are ideal for individuals struggling to pay off the principal of their credit card debt due to high monthly interest payments. With balance transfer cards, you can make one low-rate monthly credit card payment instead of several,” Herron writes.

Herron explains that debts could be exacerbated by attempts to transfer balances because the process often involves fees and extremely high interest rates once the introductory period lapses.

“You have to do a balance transfer for the right reasons,” says former FICO and Equifax credit expert John Ulzheimer. “To do it to tread water for another 12 months before sinking is not worth it. To tread water while aggressively paying down your debt in 12 months — that’s the right strategy.”

Best Practices

If you do qualify and believe this could be a good option for you, keep in mind that balance transfers change the card’s grace period. Investopedia defines a grace period as “the time between when your credit card billing cycle ends and when your credit card bill is due, during which you don’t have to pay interest on your purchases.”

When you carry a balance on a card, you no longer have a grace period, as you are constantly accruing interest charges. When you do a credit transfer, the card will now carry a balance — even if that transferred balance does not get charged interest — so any purchase you make on that card after the fact will have interest charged from the moment you buy.

The only way to avoid that conundrum is to pay off the entirety of the balance of the new card before the first bill comes — and if that was an option, you likely wouldn’t have done the balance transfer in the first place.

One option is to transfer your balances to the zero percent card and leave it be. Make no other purchases on the account. That way, you don’t even have to worry about the grace period.

“Meanwhile, attack the balance transfer debt before the introductory period is up. And make sure every payment gets in on time. Otherwise, the intro rate could disappear,” Herron advises.

Personal finance expert Amy Fontinelle offers another helpful option:

“Choose a credit card that offers a zero percent introductory APR for the same number of months on both balance transfers and new purchases,” she says in an Investopedia article.

That said, it is important to always carefully read the terms and conditions — or the “fine print” — and if it is unclear to you how it will work, it is best to pass on the offer and consider other debt resolution options, Fontinelle says.

Jumping into a credit card balance transfer without completely understanding how it works and how you will attack it from there creates the risk of burying yourself in an even deeper hole of debt. However, when executed properly, it makes having and paying off debt much more manageable.

 

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