For many, transferring a high-interest balance to a lower interest card is a way to make the challenge of managing credit card debt a bit easier.
Even when you have the best of intentions, it can be incredibly difficult to make a dent in the debt you owe -- especially if interest charges keep chewing up a big part of your monthly payment.
"Before you initiate a balance transfer, you need to understand all the angles," says Scott Halliwell, a certified financial planner professional with USAA. "You want to make sure your 'one step forward' won't soon be followed by two steps back."
Is it right for me?
Transferring a balance from one credit card to another may be a smart savings move, but it isn't for everyone. These tips can help you figure out if a balance transfer could be right for you.
1. Take an interest in interest rates. Ensure that the card you'd be moving your balance to has a lower interest rate.
"Consolidating higher interest rate debt to a lower interest rate card can lead to substantial savings on interest expenses and help pay off debt faster if managed appropriately," says Rachael K. Biel, director of credit card product management at USAA Bank.
You may be able to take advantage of introductory offers that drop the interest rate on the card even lower (sometimes to zero!) for a limited time. If you can, take advantage of your lower rate by paying off the balance transferred before the end of any promotional period. If that's not possible, try to pay more than the minimum required.
2. Dont forget the fees. Consider the balance transfer fee associated with the transfer, if there is one, and make sure it does not exceed the expected savings in interest charges, Biel says.
When there is a fee, it typically ranges from 3 to 5% of the amount transferred.
3. Avoid temptations. Even if the math works out in your favor, there are reasons not to make the move. While transferring a balance can help reduce the amount of interest paid both in the short term and potentially in the long run, it doesn't make the debts go away and can add a level of temptation that you may not be ready to face.
"Balance transfers are not for everyone," Biel explains. "Even if it makes pure financial sense, freeing up your credit lines from multiple cards may be too tempting for someone that doesn't have strong control over their spending habits. They could do the balance transfer only to end up incurring new debt on their freed-up credit lines."
4. Read the fine print. In addition to coming up with a plan to pay down your overall debt, it's important to understand the terms of the balance transfer offer before accepting it, says Greg McBride, senior financial analyst with Bankrate.com
"One late payment could cause the rate on your balance transfer to skyrocket," he says.
And it can be even more complex than that, McBride notes. "Read, and make sure you understand, the fine print. Some agreements have broad default clauses that allow the credit card company to hike up your rate if your credit report shows you were late with a payment on another card."