Understanding Credit Cards: What are Balance Transfers?

by Amy Lillard

Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.

(11/8/2012) If you have a credit card balance you'd like to pay off, and would like to pay less interest doing it, balance transfers can be a good option.

A balance transfer is exactly what it sounds like — a borrower opens a new credit card and transfers a balance from another card. The balance can include both money borrowed for purchases, and accrued interest over time.

Credit card users can often find that balances creep up over time through a combination of purchases and high interest rates of over 15%. Paying down the balance can become difficult, as interest continues to be charged and the principal then increases.

Balance transfers can be a smart way to end this downward slide. Credit cards will often offer the opportunity to transfer a balance with an introductory period featuring little or no interest. This initial introductory rate often lasts a few months to a year after the transfer, offering borrowers the chance to make payments that actually reduce their debt, without incurring additional interest.

Balance transfers may be a powerful tool for borrowers, but they should also be viewed with caution due to a few potential traps:

• Hidden charges. Some transfers may come with transfer fees, annual fees and more.

• Regular interest rate. There may also be strict and little-known rules about when the introductory period ends, and a big jump to a higher rate after.

• Rate for new charges. While the interest rate on the transferred balance may be low or nonexistent, some cards will feature a much higher interest rate for any additional charges.

• Qualification. Applicants may need to qualify for the advertised introductory rate. Other applicants may instead receive a low, but not as low rate.

Read balance transfer offers and user agreements carefully to make the balance transfer practice work for you.

For Additional Reading:

50 Articles About Balance Transfers:
http://www.balancetransfercreditcards.org/50-articles-about-understanding-the-risks-of-transferring-credit-card-balances/

Understanding Balance Transfers:
http://www.creditcarddebt.org/balance-transfers-on-credit-cards.html