Great care is required by consumers in order to properly exploit the potential benefits offered by balance transfer credit cards without falling into a trap of higher spiralling debt.
What are Balance Transfer Credit Cards?
These offers allow you to shift the balance you owe on an older card to a new account at ostensibly more favorable terms. Usually, this means transferring debt being paid at a particular interest rate to a new issuer who offers lower rates for payment of that debt.
This basic condition, however, is a temptation to engage in acts of revolving credit which can backfire badly in a number of ways. Card issuers offer introductory periods at very low interest -many at 0%- to induce consumers to transfer their balances. These periods range from 6 and up to 12 billing cycles. A 0% transfer rate for 9 billing cycles means that no interest is paid on the balance transferred for 9 months following. Regular rates kick in as soon as the introductory rate expires.
The obvious question that comes to mind is: Why would credit card companies offer these terms? What's in it for them? Make no mistake....the companies do make a profit on these deals. In order to remain within guidelines confering the benefits of favorable rates, one must not:
Be tempted into new spending that pushes the account balance past the credit limit
Carry too high a balance past the introductory rate period, when regular rates kick in.
Not violate other terms of services written into the small print of these offers
When Should One Opt for Balance Transfer Credit Cards?
As difficult as it is to resist seeing these offers as a chance to spend more at lower interest rates, it's a very good idea to use these offers to pay down the balance on an old credit card. Very little else makes much practical sense unless one is extremely disciplined about ones spending with the new account. Make sure that all details of the offer's terms after the intro rate expires are understood. Make sure additionally that the difference in interest rates between balance transfers and new purchases is also understood. These two rates usually differ. Additionally there may be fees associated with the new account, both for establishing it and possibly an annual fee. Cards which tend to offer a range of rewards tailored for specific niches (airline miles, gas, etc.) tend to have fewer low introductory rate incentives added.
Use our handy Credit Card Comparison Calculator to compare the advantages of a potential new account with your old one. Our calculator allows you to compare how long and under what conditions it would take you to pay down the debt from an old card after its balance is transferred to a new account with more favorable rates.
What Should One Do with the Old Account?
There are two contrasting schools of thought on this. Very often, one finds suggestions to close the old account and be rid of it. We hold the view that excessive numbers of instances of termination of such accounts can harm your credit history. It is much better to have the open credit line and have this reported to the credit bureaus and have it be part of your file. Regardless of which option you choose, here is a useful Balance Transfer Cards Checklist Tool from Bankrate to help with the transition from the old offer to the new one.