Meaning of Balance Transfer

The average American household had an average of $15,788 in credit card debt as of March 2010, at an average interest rate of 14 percent, according to CreditCards.com. Like most people, you probably look for ways to lower monthly debt. One option that many credit card companies offer is a balance transfer.

Function

Credit card companies want cardholders to maintain a high balance, so they encourage the transfer of debt from another credit card to the one they issued. When you open the new credit card, you tell the company how much you want to transfer, and from which account numbers. In some cases you can do a fast, easy transfer via the Internet, by submitting a list of the accounts you want to pay off when applying for the card.

Fees

At times, credit card companies offer free balance transfer offers with no associated fees. You might find yourself in line for this type of offer if you have a good credit score and a good relationship with the credit card company.

Most card companies charge a balance transfer fee. The fee might be fixed or it might be a percentage of the amount that is being transferred. Typically, transfer fees are 3 percent of the amount transferred in each specific transaction, or $5, whichever is more.

Benefits

A balance transfer can allow you to receive a lower interest rate and reduce monthly expenses. A person with a 14 percent interest rate on a credit card can expect to save $100 each year for every $1,000 transferred to a card with a zero percent interest rate, according to SmartBalanceTransfers.com.

You also might prefer seeing your debt in one account and slowly chipping away at one large bill, rather than having to remember to pay multiple credit card bills each month. If you're late on the payment, you have to pay only one late fee instead of multiples fees on different accounts.

Warning

Be diligent about paying off the balance quickly. The low-interest or no-interest rates last for only a few months. Do not acquire more debt by placing charges on the card the debt was transferred from. This defeats the purpose of transferring the balance in the first place.

You might see a sharp rise in the interest rate once the promotional period ends on the card to which the balance was transferred. Pay the minimum balance on the accounts you are transferring until the process is complete. Failure to do so could result in a late fee.

Considerations

When deciding to make a balance transfer, read the fine print carefully. Some companies offer a rate of zero percent but they dont guarantee it. The rate that you receive can vary, so confirm your rate when your card arrives.

Also, verify that the rate is zero percent both on transfers and on subsequent purchases. Otherwise you might find yourself paying high interest on smaller purchases made after the balance transfer.