Balance Tranfers

Credit card issuers promote balance transfers heavily in their advertising and direct-marketing offers. As we’ve warned elsewhere in this book, transferring credit card balances is not the same thing as paying off credit card debt—even though card companies use terms like “pay off your other cards” in their promotions.

But a well-timed balance transfer can reduce your money payments, in some cases substantially. So the process is worth some mention.

The key to a smart transfer is doing your homework. You may even want to create a chart like the one below to compare deals. We put together this example, assuming that you’ll pay on time each month and maintain a constant balance of $2,000.

By switching your $2,000 balance from Credit Card 2 to Credit Card 1, you can save $145 over the course of a year. A larger balance would mean an even more dramatic difference.

But several other factors, like late fees and penalty interest rates (if any), can throw a wrench into the works. If Card 2 is more forgiving than Card 1, and if you’re likely to be late on a payment or two, then you may be better off staying put.

Also, some credit card issuers will transfer your balance for free, but many will charge you for the privilege. Balance transfer fees can be as much as 3 percent of the amount being transferred, although some card providers cap their fees at $35 or $50 per balance transfer. Still, by the time you’ve paid the transfer fees, the money you’ll save in interest may be negligible—or nonexistent.

If you have good credit, you might want to consider an alternative to a balance transfer. Instead, you may be able to renegotiate the interest rate with your current credit card issuer. Credit card companies like to hang onto their good customers, and they often will lower the APR—or waive your annual fee, or increase your credit limit—if you simply call customer service and ask.

If you do jump ship, be careful when you transfer that balance. Sometimes, a balance transfer done by phone or via a balance transfer form can take as long as four weeks to go through. This most likely will make you late with the payment on your old card, if you didn’t mail in a payment separately.

One way to avoid the risk of delays is to use a “convenience check” from the new credit card company to make the transfer. That way, you can mail it in on time as if it were your regular monthly payment.

Once your balance has been transferred to the lower-interest card, your minimum monthly payment will be lower. But try not to spend the savings. One good idea is to keep paying the monthly minimum you were making on the more-expensive card. This will help you pay down your debt—which hasn’t really changed.

Next: Surprise Balance Transfers