Understanding Balance Transfer Credit Cards

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It is possible to transfer the balance from one credit card to another with a lower interest rate. This is generally called making a balance transfer, and the credit card you transfer the balance to is called a balance transfer credit card.

Opening up a new account on a low interest rate balance transfer card and transferring funds from another credit card where you are paying higher interest seems like a no-brainer, but there are a number of factors to consider. The primary considerations are the difference in interest rates and whether the rate on the balance transfer card is permanent or an introductory rate that will only last for six months or a year. Annual fees and penalty fees should also be factored in and almost all credit card companies today also charge balance transfer fees.

Consumers should keep in mind that some credit card issuers will advertise very low (or zero) interest on their balance transfer cards, but the fine print says “only if qualified,” so if your credit is poor you end up with an account at a higher interest rate. In many cases people don’t even realize it until they receive a statement. Carefully read the all of the terms before signing up for a new balance transfer credit card.

It is also a good idea to go ahead and do the math to see how much you will be saving with the lower interest rate after paying all the fees and so forth. If you are only going to save $25 a month for six months ($150 total), but you have to pay a $50 annual fee and a $50 balance transfer fee, is it really worth all the effort just to save $50? ($150 savings – $100 fees = $50 total savings)

Balance Transfer Fees

Almost all credit card companies today charge balance transfer fees of one to five percent, usually capped at $50 or so, but not always, so make sure to read the fine print. It is very important that your balance transfer fees are capped if you are planning to transfer relatively large amounts to your new balance transfer card. For example, if you transferred $8,000 to a lower interest balance transfer credit card with a four percent uncapped balance transfer fee, you would be paying $320.

Higher Rates on New Charges

Consumers should also be aware that a number of balance transfer credit card issuers charge a different interest rate for new purchases. That means that you only get the very low or zero interest rate on the amount you transfer and all new purchases or cash advances are charged a higher interest rate. Furthermore, most balance transfer contracts read such that all payments made are credited as payments on the low-interest charges, not the high interest charges, which only start to get paid off after the low interest charges are fully repaid.

Closing Old Accounts

While it might seem obvious to go ahead and close the old credit card account with the high interest rate to avoid annual fees and so forth, that is not always a good idea because of the way credit scores are calculated. If you have had the old account for more than two years and have a good record of payment, you might not want to lose that positive input into your credit score. This is especially true if the credit limit on your new balance transfer card is less than the limit on your old card, as that would increase your net “debt percentage,” which can lower your credit score.

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