Transferring a high-interest balance to a card with a low rate can save a bundle of cash and speed up your path to debt freedom. But, be careful. The rules are different for each card.
1. Check the time limit carefully. Most offers last only six or nine months, then revert to a more traditional rate, usually around 16 percent. If it's not clear what rate the card will eventually charge, call and ask. Use this work sheet to keep track of what the companies tell you.
5 balance transfer trip-ups
- Check the time limit carefully.
- Know what zero interest covers.
- Beware of hefty fees.
- Watch out for bait-and-switch.
- Always pay on time.
2. Know what the zero or low interest really covers. Many cards charge the low rate only for balances transferred from other cards. Sounds like a good deal. And it is -- if you remember that new purchases on these types of cards will be charged at a higher interest rate. What's more, the credit card company will apply all of your payments to the zero or low-rate balances first, until they are paid off. That means your new purchases will continue to revolve on the card and rack up interest costs. Of course, if you know that's how it works, you simply never use the card for new purchases. Instead use it as a smart way to lower the cost of your outstanding debt.
Other cards work the opposite way, applying the zero or low interest only to new purchases. If you don't realize this you can end up paying full interest on your existing debt plus the transfer fee. Best to avoid balance transfers on these cards, says Jane Bryant Quinn, personal finance expert and author of "Smart and Simple Financial Strategies for Busy People."
3. Beware of hefty fees. Most cards charge a certain percentage when you transfer a balance from another card, usually about 4 percent, with a cap of $25 or $50. But, says Bill Driscoll, a financial planner in Plymouth, Mass., more and more cards are eliminating the cap. So, if you transfer, say, $5,000, you'll pay a $200 fee. Worse, some cards count the fee as a new purchase and charge the higher rate on that part of your balance. You want to only consider cards that have a cap on their transfer fees.
4. Watch out for bait-and-switch. Just because you applied for zero percent doesn't mean you'll get it. Credit card companies will sometimes issue you the card but assign a higher rate if your credit score is low. Most people don't realize this has happened until they get their first statements. Be sure to read the agreement of terms that comes with your card carefully before you transfer a balance or make a purchase.
5. Always pay on time. That zero rate will disappear the minute you're late. You'll end up paying the full rate that the card converts to immediately. Another late payment and your rate might be bumped as high as 30 percent.
Do you have a secret to success with credit cards? Or, are you struggling? .
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