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Credit Card Blog - The Finer Points of Balance Transfer Credit Cards

 Thursday, 16 November 2006

One of the fastest growing categories on Your Credit Network is the section dedicated to balance transfer credit cards, and it’s easy to see why. As credit cards replace cash as the unofficial currency of America, more people are shifting toward managing a number of credit cards in an attempt to raise their credit rating as well as finance the things they couldn’t otherwise afford for a seemingly reasonable fee. The average credit consumer in the United States maintains 6 active credit card accounts, and at some point they may just scream ENOUGH and try to find a way out of so many bills to pay. Credit cards with balance transfer programs offer a way out of this nightmare, but this begs the larger question…

Do balances transfers have a negative effect on your credit?

Deciding to take advantage of a balance transfer program from a particular credit card issuer is a lot like deciding to lease or buy a car from your local car dealer – it depends on how long you intend to carry the balance and how often you want to switch out your car for the latest & greatest model (or in this case a different balance transfer program with more rewards or more favorable interest rates.)

If you carry a bunch of smaller balances with different credit companies and could potentially pay off all balances within two years, pick a credit card that fits you best and stay put. Most balance transfer credit cards offer promotional rates of 1 year, so transferring your debts to a new card over a period of two years will end up as more or less of a wash from an interest expense prospective, so jumping around isn’t necessarily worth it.

If you carry more debt than can be paid down in two years (or you intend to accrue more debt in the form of credit card charges) then it would be in your best interest to jump around from one balance transfer deal to another every six months or so; this has the effect of essentially resetting your interest clock with your new debt issuer and can help keep you from paying a lot of money in the form of interest expense.

Balance Transfer Myths (and Facts!)

Myth One – Balance Transfers Negatively Impact My Credit
Credit is determined by a number of factors, one of which if your debt to income ratio. If you continue to make payments on your principal while realizing 0% / reduced interest rates, you are reducing the amount of debt you hold relative to your income (provided your income remains the same or does not decrease, of course.) There are some penalties for closing lines of credit, but these pale in comparison to the damage that late payments or increased balances from high APR accruals can do. The lesson here is to continuously pay down your principal amount and you’ll be fine; balance transfer credit cards can help you do that by reducing the interest paid on your principal, so more of your monthly credit card payment goes toward your balance rather than a credit card bank’s profit from interest rates.

Myth Two – There is a Limit to the Number of Balance Transfers I Can Do
This is absolutely false. Credit card companies are in a constant state of stealing business from one another, and you can use that to your advantage by letting them compete for your business. An issuing bank may have stipulations on how many accounts you can transfer over them at one time (the industry average is 7) there is no law or regulation that says you can only engage in X number of balance transfers in any given time period. (Remember that catch phrase “when banks compete, you win”? Balance transfer cards are a way for you to reduce your rates and in most cases the banks do all the work!)

Myth Three – My Current Issuer Won’t Let Me Transfer My Credit Card Debt
A lot of people seem to be under the impression that their current credit company will deny them the ability to transfer their debt to another company in order to deny that company business, but this is also false. Balance transfers look like a lump sum payment to your current credit provider, but more importantly they do not have the right to deny your payment just because another company is stealing a customer out from under them.

The Good News about Balance Transfers

  • If you stick with one balance transfer credit card and pay down your balance within the window of your offer (or shortly thereafter) you will have paid down more of your principal balance in a shorter period of time.
  • If you move from program to program once every couple of months you avoid accruing more interest expense. Additionally, you are keeping the information on your credit report fresh more frequently, which helps keep your report accurate to your current financial situation.
  • Balance transfer programs may offer additional rewards, rebates or points just for transferring your balances to one program.
  • Banks will know if you engage in balance transfers frequently and will usually send you offers in the mail to entice you to switch. This means you’ll get lower rates more frequently and you won’t have to do as much research when your current deal expires since the banks will be contacting you directly.

The Bad News about Balance Transfers

  • You shouldn’t use balance transfer credit cards as a way to avoid making payments on your principal balance. These programs work best when you can continue to pay down your initial balance while taking advantage of the 0% APR window that many programs offer – if you don’t you’re just increasing your debt at a more rapid pace when your limited time offer expires.
  • Keep an eye out for transaction fees on your credit card’s terms & conditions of use; these are the fees that a new company will charge you when you transfer existing balances to your new card. While the fees will often be nominal compared to your interest expense otherwise, there are a few offers out there that will charge quite a bit for the transferring of your balance. Here’s what to look for:

    A transaction fee should play a large (if not the largest) role in determining which balance transfer credit card offer you choose. Make sure the total transaction fee amount that you accrue is not more than you’re willing to pay!
  • Failure to make your payments on time may immediately revoke whatever deal you have worked out with the credit card issuer, so it is incredibly important to pay your bills on time.

For the latest credit card deals of this type please visit our balance transfer credit cards section – remember to examine each credit card’s terms thoroughly and completely before applying!


Thursday, 16 November 2006 18:05:40 (GMT Standard Time, UTC+00:00)  #     
Balance Transfers  | 
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