Balance Transfer Credit Cards

How to Do a Credit Card Balance Transfer Correctly

Credit card companies love when consumers make mistakes. Mistakes allow them to do their two favorite things: charge fees and increase interest rates. When you use a credit card for a balance transfer, there are a number of areas where simple mistakes could become costly. Fortunately, it is easy to do a balance transfer correctly if you pay attention to the following tips.

1. Transfer credit card balances when you get your credit card in the mail: While it may be tempting to transfer balances online when you apply, there are a number of reasons why it is best to wait. First, most companies offer multiple long term interest rates. The rate you get is determined by a review of your credit. And this review does not occur until you submit your application. Consequently, if you transfer balances online, you put yourself at risk of getting a higher long term interest rate then the one you currently have.
2. Don't transfer credit card balances online: Yes, this is exactly the same as tip 1. But for a different reason. Many credit card companies not only offer multiple interest rates, they offer multiple 0% introductory periods. Thus, while they may advertise a 0% APR for up to 1 year, you may be approved and only offered a 0% APR for 3 months. If you transfer balances online, you won't find this out until its too late. So, to be redundantly redundant, please do not transfer balances online and please wait until your credit card arrives in the mail to transfer balances.
3. Monitor your credit card balances closely: Most credit card companies state that a person should allow 30 days for balance transfers to clear. If you have a payment due on your old credit card, leave yourself enough time to get it paid. If you overpay your credit card, you can request a check or use the surplus like a debit card. Given the absurd cost of late fees, its better to be safe then sorry. (More on how long balance transfers take)
4. Make sure your balance is zero: After your balance transfer clears, continue monitoring your old credit card bill for phantom interest. Basically, if you had a balance for part of the preceding billing cycle, there's a good chance you were charged interest on that. Thus, even though you may have transferred your entire credit card balance to a new credit card, you may have a few dollars of interest due on your old card. And if you overlook this, you could end up with a late fee or something much worse.
5. Don't hurt your credit score with a balance transfer: Because everyone's credit situation is different, the impact a balance transfer has on credit scores varies from person to person. However, one key element of the credit score formula is the credit utilization ratio. Basically, this is the amount of credit you use relative to your available credit. If, for example, you use 20% of your available credit, your credit score will benefit. On the other hand, if you use 80% of your available credit, your credit score will be hurt. If you transfer your balances to a new credit card and close your other accounts, you may increase the amount of credit you are using relative to the amount of credit you have. This can hurt your credit score.
6. Never, ever miss a payment: Missing just one credit card payment gives your credit card company the right to terminate your 0% APR and increase your interest rate to the default rate. Neither of these situations is good, but this issue is easy to avoid. Ideally, a person should set up online payments. This way you can pay your credit card no matter where you are. Another good idea is to set up online alerts that tell you when your bill is due. A bad idea, although it is pushed on consumers, is to abandon paper statements. While its good for the environment, the banks push this because its good for them. Getting a bill in the mail is a much better reminder that you have a bill to pay than an email.

Making one of the mistakes highlighted above can significantly take away from the benefits a 0% balance transfer provides. Fortunately, these six credit card tricks can be easily avoided. A little patience and a little diligence is all you need to do a balance transfer correctly.

For information on current balance transfer credit card offers, please see the comparison section of Smart Balance Transfers.

Updated 23 September 2009

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Using Balance Transfers to Get out of Credit Card Debt: Curious as to how balance transfers work? This article includes a table that compares a 0% balance transfer credit card with a high interest credit card to demonstrate balance transfer savings.

How Long Do Balance Transfers Take: While transferring credit card balances online can expedite the balance transfer process, its best to transfer balances offline. Because of this, balance transfers can take a month to clear.

Balance Transfers 101: This article discusses the basics of balance transfers, including some tips on how to understand applications and balance transfer fees.