Balance transfer credit cards typically provide consumers with a low introductory interest rate for a fixed period of time. While this can be an excellent way to reduce credit card debt, it’s important that you understand how balance transfers work before taking the plunge. The Process For an example of a balance transfer, let’s consider the following scenario: A consumer’s credit card debt totals $6,500â€"$2,500 on a Visa credit card at 19.99% interest and $4,000 on an American Express with an interest rate of 18.75%. The total balance is transferred to an Australian credit card offering a 0% p.a. for 6 months on balance transfers with a 15.75% p.a. interest rate The Good While the consumer in our scenario still has $6,500 in credit card debt, he’ll enjoy an interest-free reprieve for a period of six months. While it would be savvy to pay off the balance before the end of the introductory period, the p.a. of the balance transfer card is still lower than the rates on his Visa and American Express should he need more time to pay. The Bad With no balance transfer fees, a 0% introductory rate, and a lower p.a. interest rate, the consumer in our scenario enjoyed a triple win. The bad news is, this may not be the case with every credit card. Be sure to closely examine interest rates, fees, and introductory periods to determine if the balance transfer is in your best interest. The Ugly Balance transfer credit cards should never be used for new purchases. When you use the card for anything other than a balance transfer, you essentially forfeit the low introductory rate. Why? Because all payments made will be applied to the oldest debt first. For example, if the consumer in our scenario purchased $600 worth of merchandise, the $600 would now carry a 15.75% interest rate. When the consumer makes his next credit card payment, the funds will be applied to his oldest debt, the 0% balance transfer amount of $6,500. The new purchase will not be paid off until the $6,500 is paid in full; in the meantime, it will accrue interest at 15.75%. When comparing balance transfer credit cards, vigilance is key. Do diligent research and be sure you understand the fine print before making a decision that could compromise your financial security.
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