6 steps for using balance-transfer cards
Offers of 0% balance transfers are showing up in mailboxes again. They can help you get out of debt, if you use them carefully.
Have you seen the credit card offers yet? You know, the 0% introductory APR balance-transfer offers? In late 2010, after a bit of a hiatus, credit card companies started sending out 0% balance-transfer offers to potential customers with good credit again.
You may have thought the days of balance-transfer arbitrage were over after the peak in the mid-2000s -- but they're back.
Most people don't have much use for a 0% APR balance transfer and if you don't, that's great. But on the other hand, if you've made a few small financial mistakes over the years but you're truly careful and disciplined now, a 0% balance-transfer offer can help you get ahead and on the right track.
Effectively taking advantage of a balance-transfer offer can help you get out of debt more quickly. However, keep in mind that temptations and pitfalls await along the way, and you can easily ruin your carefully laid-out plan.
Follow these six steps to get the money you need without finding yourself deeper in debt:
Don't get any cash advances. Read the fine print carefully, and make sure you're not getting a cash advance. Cash advances almost always come with major fees and extremely high interest rates. Some credit card companies will send you checks for balance transfers or cash advances, sometimes in the envelope right next to each other.
If you choose to use one of the checks for the balance transfer, check several times to be sure that you have the right one and avoid triggering a cash advance. Cash advances almost never work out well and are one of the things you should not use a credit card for. I do not recommend them for any purpose. Post continues after video.
Mind the math. If you get a $5,000 balance transfer at 0% interest for 12 months and a 3% fee, that is the same as borrowing the $5,000 at 3% interest. It's still a pretty good deal, especially if you plan to pay off a higher-interest loan or credit card balance with the money. But keep checking your math. If you are getting $5,000 with that same 3% fee but a 0% APR for only six months, that 3% fee translates to an annual percentage rate of 6%. It's not nearly as good of a deal.
Think about the balance-transfer fee the same way you'd think about the APR. Many fees run as high as 5%, and that upfront cost is also the reason why you do not want to pay off a 0% balance transfer early. Leave your money in the bank where it can earn interest until the final payment is due. Of course, the best type of 0% balance transfer is a no-fee transfer. It's an attainable ideal: I received two no-fee offers in the last month, one from US Bank and the other from Commerce Bank.
Keep lines of credit open. It is almost never a good idea to close a line of credit, for many reasons. First, closing a line of credit can hurt your credit score. Second, an open, unused line of credit helps keep your credit-usage percentage low. If you have $10,000 worth of unused credit on one card and then open a 0% balance transfer of $10,000 on another card, your credit usage will show up as only 50%, even though you may never plan to use the existing card ever again. It's a simplistic example, but the principle remains the same.
Keep good records. If you decide to use a balance transfer to help you get out of a financial pinch, be sure you have an exact picture of details like your balance, payments, deadlines, and end date of the introductory promotional period. Online credit card banking is a convenient way to keep track of your low-interest loan. Keep the the paperwork with the original terms of the balance-transfer agreement in case you find any discrepancies later on. When the end of the introductory period is only a few months away, I always call the bank to confirm the date by which I need to pay off the transfer without paying interest.
Pay on time. Nothing will mess up a sweet balance transfer faster than late payments. If you are prone to late payments, a 0% balance transfer is not worth your time. With credit card fees and added interest, you'll likely owe far more than you did before the transfer.
Do not use the card. After you transfer a balance to the new card, put it away. Resist the temptation to add to that balance by purchasing more stuff. A 0% balance transfer is a chance to take a breath, pay down debt, and get ahead. It's not a card to use for digging a deeper hole.
Make no mistake, companies offer 0% balance transfers because they find plenty of ways to make a profit on the mistakes customers make. If you're not careful, despite your best efforts you'll be trapped in even more debt. But with these six steps, you're prepared to make responsible decisions and use the transfer to your advantage.
Have you already given 0% balance-transfer credit cards a try? What dangers were the toughest to avoid?
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Mitch Lipka has been warning people about scams and shining light on questionable business practices for more than 20 years. Mitch, the consumer columnist for The Boston Globe, has also been a reporter and editor at The Philadelphia Inquirer, Consumer Reports, South Florida Sun-Sentinel and AOL. He won the 2010 New York Press Club award for best consumer reporting online and was honored in 2011 for his reporting on child product safety.
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