Be cautious with balance transfer credit cards

Be cautious with balance transfer credit cardsThe ability to make a balance transfer work for you comes down to your ability to grasp all the details involved. Many Canadians are struggling to pay off their credit card debt and would welcome the chance to save money on a lower rate interest rate credit card. One of the best ways to lower the interest you pay is to transfer outstanding balances from a higher interest card to one that charges a lower interest rate.

Before you choose which balances to transfer to which credit cards, it's a good idea to review the best way to take advantage of a balance transfer offer. You also will want to read the fine print, which may be found online, on credit card brochures, or by talking with a credit card's customer service representative.

First, be wary of those credit card offers that only provide short-term temporary savings on interest rates. If the offer is only for one or two months, and you have not paid off the card in full in that time, you could be stuck with paying an even higher rate than if you had just left your debt on your current credit card.

Here are some additional things you will want to know before you dabble in credit card balance transfers:

Do the math. Find out if the credit card company will be charging you a balance transfer fee, which usually starts around 3 percent. This is the amount the credit card company will charge you for the privilege of transferring your balance from another card to its card. It's best to sit down and figure out if this charge is worth spending the money on for the balance transfer. For example, the issuer may charge you 3 percent of the total amount of your transfer. So, if you are transferring $10,000, there will be a $300 charge to your account, in addition to financing charges. If you don't pay off the balance quickly, you'll end up paying interest not only on your balance transfer amount, but on the balance transfer fee as well.

Balance transfers are subject to approval. You will need to continue making payments to your original credit card until you receive notification that the transfer has been completed. Allow at least two weeks for completion.

Balance transfer deals are subject to available credit. Make sure the credit limit on the credit card you will be using for your balance transfer has enough credit on it to cover the amount you want to transfer, plus some. You don't want to max out the credit limit on a new card as that will hurt your credit score. Keep the balance transfer amount under 30 per cent of the total credit limit if possible.

Interest rates are applied immediately. There is no grace period as there is if you had been making purchases from a store. The interest is applied starting on the actual balance transfer date until the amount is paid in full.

Exact interest costs can vary. The interest rate on a credit card can be affected by amount, timing, outstanding balance, payments made, grace period and other factors. Talk to your credit card company to best nail down what costs apply in your case.

By asking questions and reading the fine print, you will be able to shop around for the best way to conduct your balance transfer. You will be able to save yourself money, which can then be used to pay down your debt.

Written by Melanie Dixon.
Published July 17, 2009

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