Friday, April 17, 2009

Balance Transfers: A Positive or A Negative

Many credit card companies make it easy to transfer credit card balances from one credit card to another offering a lower interest rate for a promotional period of time. After that promotional period expires you will be required to pay a much higher interest rate and any payments made will first be applied to the old debt.

Any future purchases will continue to accrue finance charges. Once the old debt is paid down then any payments made will be applied to the new purchases. You may say – what is the point, I don't see the benefit.

Well, for those Americans who are struggling to pay down credit card balances with interest rates of 17%, 21%, 25% or 32%, a balance transfer is a reasonable option but should not be your first option. You should try to negotiate with your creditor to get a lower interest rate at least temporarily. If your creditor refuses to work with you, you can file a complaint against the creditor. To save time and money you can transfer the balance to a low interest credit card.

Remember that each time you open a new account it counts towards your credit score and if you have opened more than 1-2 accounts in a 24 month period your credit score will slightly decrease. However, once your debt is paid down to 30% or below the credit limit your credit score will increase.

Transferring credit card balances may also lower your credit score because it is an indication that you are unable to manage your money. The biggest mistake made with transferring credit card balances is not reading the credit card agreement to find out all the terms and guidelines associated with the credit card.

The key to balance transfers is to pay off the transferred balance before the promotional period ends and use the card only occasionally for small purchases paying the balance off in full at the end of the month to prevent paying high finance charges.

Do some comparison shopping before selecting a credit card that offers a balance transfer. Some good sites to use are bankrate.com and creditcards.com.

Here are 5 reasons to transfer a credit card balance to another credit card with a lower interest rate.

1. If your current interest rate is higher than 12%
2. If you are struggling to make the payments due to late fees, over-the-limits fees and finance charges.
3. If you know you will be able to pay the debt off before or by the end of the promotional period.
4. If you are have at least an average credit score of 650 or above and can get approved for a new credit card.
5. If you are serious about getting out of debt.


The goal is to get out of debt and the fastest way to get out of debt is to pay more than the minimum monthly payment.

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