Balance Transfers

Looking for a way to reduce your monthly expenses and free up some cash? Transferring a credit card balance to a plastic with 0% or at least low interest rates can help. It is an excellent way to pay off your remaining debt sooner and save hundreds of dollars on interest charges. However, before you rush off to look for the most suitable balance transfer credit card, consider our tips. Although the concept of a balance transfer seems simple enough, there are some hidden pitfalls that you need to know about. Ignorance could turn out to be a very costly mistake.

1. Before you submit an application, check your credit history. Do you have a consistent record of timely credit card payments and a reasonable number of open credit lines? In order to get approved for a balance transfer credit card with 0% APR, you are required to have a good or excellent FICO score. Otherwise, lenders may offer you a higher interest rate than you expected.

2. Analyze your current financial situation. If you have a debt of $20,000 distributed on several high interest rate plastics, it is highly unlikely that you can move the whole amount onto a single credit card. Many lenders allow transferring only a portion of such a debt, for example $5,000. Consider it as a first step to a debt-free future.

3. Beware of the balance transfer fee. Typically, it is the percent of the amount you are going to move - from 1% to 3%. While this may not sound like much initially, it can be a significant amount if you have a large balance. Fortunately, many banks cap the balance transfer fee at $50 or $85. Read the fine print to understand the actual costs you will need to pay.

4. Typically, it is not allowed to make balance transfers on the plastics from the same issuer. So, if you have a debt on, for example, Hilton HHonors Platinum Credit Card from American Express, then you can't move your balance on another American Express plastic. But you can always search for the credit card offers from other banks, for example Chase or Capital One.

4. Pay attention to the interest rates on purchases and cash advances because many plastics come with a zero or low APR on balance transfers only. For example, you can find offers with a 0% interest rate on balance transfers and a 12-16% APR on purchases and cash advances.

5. Don't forget about negative payment hierarchy. It means that your credit card payments will be first applied to the transferred amount because it has lower rates. For example, if you transfer $5,000 and then spend $50 for a nice dress, all your payments will go towards the $5,000 until it's paid off. Meanwhile, the $50 accumulates the regular interest rate. If you need several years to pay off the balance transfer, your cash advances and purchases may accumulate much interest.

6. Shop around for the best credit card terms and features. Zero introductory rates are very tempting, but don't turn a blind eye to other credit card features. Compare all fees, interest rates, payment policies and point or cash back rewards programs of the plastics you want to apply for. And be realistic about how quickly you'll be paying down your debt. If your budget doesn't allow you to repay the balance before the introductory rates expire, check what APR you will need to pay afterwards.