Basics of Balance Transfers

A balance transfer is a service offered by credit card companies. It typically occurs when a customer switches from his existing credit card to a new credit card. When completing a balance transfer, the outstanding debt (balance) owed on that person's old credit card is transferred to a new credit card with a lower interest rate.

A credit card balance transfer is seen by many as a good way to save money because the lower interest rate results in less finance charges. In fact, credit card companies often offer interest-free balance transfer offers as a lure for new customers. It is also possible to find a credit card company that does not charge as high an interest rate as the customer is currently paying on his existing credit card.

How do I execute a balance transfer?

When you switch from your existing credit card to a new credit card, give your new credit card company the details of your old credit card. Once you have done this, you can request the company to begin your balance transfer. Or, you can do it yourself using the company's online banking facility. You can also transfer your balance from one existing credit card to another existing credit card, but this often involves paying extra fees for the transfer. Usually, the best time to do a balance transfer is when applying for a new credit card offering a special introductory package.

What should I check before doing a balance transfer?

While a balance transfer scheme may look very attractive on the face of it, there are certain pitfalls you should be wary of while implementing a balance transfer. Most of these pitfalls are consigned to the fine print and you should read the fine print thoroughly before deciding on your balance transfer.

Teaser Rates

Often, credit card companies announce very low interest rates for balance transfers. Where the normal rate may be as high as 25%, these rock-bottom rates will be as low as 3%, or sometimes even 0%. However, there is a catch. These interest rates would only apply for a few months after your balance transfer and not throughout the period of your debt repayment. What's more, these rates apply only as long as you're a perfect customer. A single late payment is often enough justification for the credit card company to revert to charging you the normal interest rate. Thus, it's important that you choose a credit card company which charges a normal interest rate that's lower than the rate charged by your existing credit card company.

Promotional Offers on New Purchases

Some credit card companies offer you low or no interest charged on new purchases for a fixed period, such as six months for example. After that, the interest rate is jacked up depending upon your credit limit and purchase behavior. At that time, an interest rate is also charged for any balance transfers you might make to that card.

Balance Transfer Fees

While credit card companies may offer you rock-bottom interest rates, even 0%, they often charge hidden fees. The fees could vary anywhere from 3% to 5% of the amount being transferred and are charged to you at the time of the balance transfer.

Will You Qualify?

A little-known, little-observed rider in the fine print may disqualify you from being eligible for the low interest rates. This could be based on your current usage patterns, your previous credit card history, your annual income, or just arbitrary.

Other Fees

You must also find out what are the regular fees charged by the credit card company. Is there an annual fee charged? What are the late payment fees and the overdraft fees? Most credit card companies can be persuaded to waive annual credit card fees when you sign up with them.

Overall, you should be very careful while transferring your credit card balance to another card. Read the fine print. Choose your new credit card company carefully. Verify every step of the transaction with the new credit card company, as well as your existing credit card company. And, make sure you rack up no new balance on your old credit card after you have transferred your balance. Otherwise, you will simply find yourself right back where you started.