Just when you think you're drowning in a sea of debt, you get a life preserver thrown your way, or so you think. The life preserver comes in the form of an offer to open a new credit card account and transfer existing credit card balances to the new card. This new card may offer an attractive low or no-interest rate for an introductory period.
Depending on the terms and conditions associated with the balance transfer offer, you may be able to save money.
Assessing Your Debt Situation
Balance transfers may help you reduce your monthly finance charges (APR), but only if you have a certain degree of self-discipline about using credit cards. Chances are, you may be challenged in this area if you're struggling with debt. But transferring balances from high APR credit cards to a no or low APR card can make sense if you can commit to paying off the amount you transfer before the introductory offer expires.
Understand the Difference between APR and Interest Rates
Balance transfer promotions may offer "0% interest for six months" or a "low introductory rate for balance transfers for the first three months." If you're paying high interest rates on your existing credit card balances, it can seem like a no brainer to transfer, but don't be so hasty.
APR (annual percentage rate) is the amount of interest, fees and other charges you pay on a particular account expressed as an annual percentage. By law, the APR appears on all credit card offers and on each monthly billing statement. When considering a balance transfer offer, you'll want to compare APR's rather than being tempted by low "teaser" rates.
Teaser Rates Can Get Your Attention--and Your Money
Some teaser rates can be useful for managing debt. If you have a high APR debt that you plan to pay with a tax refund or other guaranteed lump sum, transferring to a card with a low initial rate can help you save on finance charges until you can pay off the balance.
Fine Print on Existing and Potential Credit Card Agreements
Before you make a balance transfer, it's important to understand all costs associated with the offer. Balance transfer fees assessed by the new card company, and possibly your existing card company, can significantly reduce the benefits of transferring a balance.
Develop a Debt Management Plan
Used under certain circumstances, credit card balance transfers can be a short term solution to reducing the costs of debt. If you're carrying a lot of debt on multiple credit cards, it's time to develop a strategy for paying off your debt and managing your budget on a cash basis. Financial advisors and non-profit credit counseling agencies can help.
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