Consolidating Debt - 5 Tips For Transferring Balances

Transferring your high interest credit card debt to a lower fixed rate interest card makes a lot of sense and it an easy way to cut down on your monthly payments. You can accomplish this by simply transferring to a card you already have, or by searching for a new card with a more attractive interest rate. There are several places online where you can do a search for a lower interest rate card, such as cardtrak.com

Before you transfer any balances, you’ve got to be sure that you read all the information that is provided by the card issuer, including all the terms that may be found in the small print. After you read the terms, you may very well find that the offer isn’t as good as it first seemed. If you don’t read the fine print, you may find yourself with a lot of expensive additional fees or penalties. Another common term in these seemingly attractive cards is an interest escalation clause that could raise your interest rate substantially for a late payment - even if you a single day late.

You are also likely to find that much higher interest rates apply to new purchases or cash advances you make with your new card. The lower fixed interest rate applies only to the balance you are transferring over to the new card. If the interest rates are not spelled out, contact the card issuer to find out what they are before signing on.

Here are my top five tips in helping you determine if you will really save money by transferring balances:

  1. Determine the interest rate on the offer and find out how long the rate will last.

    Many credit card companies try to pull you in with a super low interest rate to start off with when transferring balances, but the offered rate will likely expire after 2-3 months. If you don’t think you’ll be able to pay the transferred balances off within the low rate period, it may not make any sense to do the transfer because you could find yourself paying a higher rate on the transferred balances than you are currently paying.

  2. Know what you need to do in order to keep the interest rate low.

    You’ve got to read the small print! As a general rule, most credit cards have escalation clauses that will jack up your interest rate if you are late with a payment, regardless of how late the payment is. In addition, there are some cards that employ a “universal default clause”. This clause gives the credit card company the right to raise your interest rate at any point if it reviews your credit history and finds that you were late in paying another creditor, or bounced a check.

    Another situation is how you go about transferring the credit to pay off your other debts. If you use the cash advance feature, you’ll likely pay more - a lot more. As can making a transfer by phone. Before you sign on to a new card for debt consolidation reasons, be sure you know the most cost effective way for transferring credit card debt.

  3. Know when interest charges will begin to accrue on the debt you transfer.

    Usually, the answer is immediately, but if you look hard enough, you may find one that doesn’t start charging for 30 days.

  4. Know how much the balance transfer fee is.

    Fees certainly vary, but most of the time, the fee is a percentage of the amount you are transferring. But, some credit card companies may cap the fee at $25, $50 or $75. Some simply charge a flat fee.

  5. Know what method will be used to compute your monthly payments.

    This is important because there are several methods in play. Look for a card that uses the adjusted balance or average daily balance (excluding new purchases). Stay away from those that use the two cycle average daily balance method.

Also make note of whether the card has a 20, 25 or 30 day grace period, or the number of days between statements. You’ll pay the most to use a card with a 20 day grace period.

I don’t recommend using the credit card you’ve consolidated debt with to make additional purchases, but if you do, pay attention to the rate you pay on new purchases. The bank that issued the card will probably apply any payments you make to the lowest rate balance first, meaning that every time you make a purchase, you’re actually converting lower rate debt into higher rate debt.

An easy way to avoid this situation is to not use the debt consolidation credit card for new purchases until the transferred debt is paid off.