Credit Card Balance Transfers Can Help You Only If You Understand What You Are Doing and Why

If money is tight, and you either don't see a raise coming, or worse, you see your income dropping in the future, you may want to get creative and transfer your credit card balance to a card with a lower interest rate. Done right, it could save you money. Done wrong, it can cost you money and give you more financial hassles.

The process may not be smooth and easy. There may be fees, penalties, and other costs when you make the move to another card.

The one thing you have to do is read the fine print. Different credit card companies handle balance transfers differently, so if you have more than one card, read the rules carefully for each.

Rate Jumps
Most of the deals out there involve a low initial rate, followed by a higher rate. You should find out exactly how long the lower rate lasts, how high it will go, and what you have to do to make sure the rates change to the right amount at the right time.

You should also check out all of the other costs and administrative issues, like the following:

• Fees for moving the balance
• Whether that fee is a specific amount or a percentage of your balance
• The fees your old credit card company may charge for closing your account
• Fees, rates, and penalties for the new credit card company
• Whether you will be notified when a balance has been transferred or an old account closed
• What would have to happen for the new company to change the terms of the deal.

Beware of of anything in the agreement that lets your interest rate or fees step up several time. You may find that it starts with low or even no fees or interest, and over time the agreement allows them to boost those rates and charges up.

One way this may work is that you may transfer with no interest on your transferred balance and for new purchases for a few months. You then may see one rate for your balance and a very different one for new purchases. The deal may start off sweet, but turn sour.

Paying Off the Old Debt Early
Credit card companies make their money from interest and fees. If you can pay off your balance when the interest rate is at its lowest, you could be doing yourself a big favor. Look at the rules. You may have a situation where the interest rate on the transferred balance zooms up. To avoid surprises, take the time to come up with a realistic plan that takes into account the rules of the new card. If that new card gives you a chance to get rid of some bad debt and avoid future interest and penalties, do it.

Transfer Limits
Some companies may limit how much you can transfer or how many times you can transfer a balance. They may also have fees or penalties if you go beyond these limits.

Timing the Handoff
Pay attention to how long the whole process will take, and when you can stop paying on the old card and start paying on the new. Avoid paying for a balance in two places at the same time,even if it is only for one month.

The Big Picture
If you are changing cards to avoid high interest rates or high penalty fees with your old card, the biggest problem isn't the old card company, but rather your actions. Having a balance on a credit card shouldn't be normal, it should be something you avoid. It's one thing if your card balance is because of a short term situation. Proper planning should get you out of that situation over time. If your balance problem because you were spending too much on things you didn't need, then you should look at changing your behavior as well as changing your card company.