Balance Transfers 101

If you have a series of credit cards and other high-interest rate debts that are difficult to keep track of and cause you difficulties in making payments, would you believe the answer to your problems could be yet another credit card? It is possible, if you consolidate all your debts through a balance transfer credit card.

Balance transfer credit cards still work like ordinary credit cards, but the rate and fee structure are set up to accommodate the moving of debt from one card to another. There will be an introductory low-interest period (often 0%) that gives you a cushion to pay off more of the principal on your collective debt.

Nerdwallet Credit and Banking Expert Sean McQuay advises, "If consumers want to lower their interest rate for cards they already have, the best option by far is this balance transfer where they basically are taking it from whatever the rate is today to zero."

That sounds great for you, the consumer, but what is in it for the banks? Consider these aspects of balance transfer cards for the answer.

• Balance Transfer Fees The first bank incentive is balance transfer fees associated with each transaction. A typical balance transfer fee is 3% of the transferred amount.
  
  Cards try to strike a balance some offer no fees but higher introductory interest rates, while others stick with a 0% interest rate and scale their fees accordingly. Online balance transfer calculators are available to help you determine the best deal available to you.


• Post-Introductory Rate Introductory periods may be anywhere from a few months to a few years, but then the true rate will kick in and that rate will be typical of all credit cards, if not higher. Check these rates carefully, and consider the effect if you cannot pay off very much of your transferred balance within the introductory period. You may end up owing more in the long run.
  
  Keep in mind that your credit score determines the combination of interest rate and transfer fees that will be offered to you. Check directly with the banks and do not fall for teaser rates in ads. They are directed at those with the highest credit scores. You can check your credit score and read your credit reportfor free within minutes using Credit Manager by MoneyTips.


• New Purchases This is the bank incentive that trips up most people. Generally, new purchases or cash advances are charged at the higher post-introductory rate while the transferred balances are subject to the low introductory rate.
  
  The Credit Card Act of 2009 states that your payments are to be applied to the highest interest-rate balance except that the minimum required payment may be applied in any way the bank wants. Thus, minimum amounts are always applied to the balance transfer, while any extra is applied to purchases at the higher interest rate.
  
  It is best to use the balance transfer card only for the balance transfer and not for new purchases. Instead, use the best of the cards that you consolidated for new purchases and minimize those purchases.
  
  Don't close all the consolidated accounts, because then your available credit will drop and your credit score will suffer. Just use the cards sparingly, if at all.


• No Grace Periods You have no room for slop or error with a balance transfer card. Miss a payment and your introductory rate is gone, probably leaving you in worse shape than you were beforehand. Typically, there is an even higher penalty rate charged when payments are missed during the introductory period.


• Transfer Limits Cards have varying limits on the total amount to be transferred. You can make transfers to multiple balance transfer cards, but then you risk damage to your credit score and that option may only be available for high credit scores in the first place.

Watch out for the classic trick of being "pre-approved" for one balance transfer limit or interest rate, then being stuck with a lower limit/higher rate once you actually apply for the card. Any "pre-approval" that has not taken into account your debts and credit score is useless. You can apply for balance transfer cards on MoneyTips.

Check into any other fees that may be associated with the balance transfer card, and pay close attention to any rewards offers. For example, do the rewards apply only to new purchases, which will be primarily charged at the higher interest rate?

Balance transfer cards may be for you if you have a substantial amount of collective high-interest rate debt and can afford to pay a significant amount of it off during the low introductory-rate period. However, it is also important to analyze how you got into debt in the first place and make changes in your spending habits if needed. Balance transfers can only help to a certain degree, and you can only make so many of them before a poor credit score removes that device from your financial toolkit.

McQuay cautions that using balance transfer cards is like "kicking the can down the road, so you are still going to owe the money for that debt. But it gives you some room, helps you get your feet underneath you, figure out how you are going to budget, how you are going to pay off that debt."

If you want to consolidate your debt, try the free Debt Optimizer by MoneyTips.

Photo iStockphoto.com/flyfoor