Transferring high-cost credit card debt to a new credit card offering low or no interest can help you pay off credit card debt faster and with less expense. But the downside to using balance transfers is usually found in the fine print that describes the applicable terms and conditions. When considering balance transfer offers, reading all of the details (even if you need a microscope) can prevent costly misunderstandings.
Interest rates, APR, and transfer fees: The devil is in the details
Credit card companies offer many cards with low or no interest balance transfers during a specified period of time. But when the introductory period expires, your balance is subject to the usual interest rate charged for the card. If you can transfer a balance and pay it off during the introductory period, you will likely save on finance charges.
But credit card companies often charge a balance-transfer fee calculated as a percentage of the amount transferred. If you transfer a balance of $1,000 and the balance transfer fee is four percent, you'll pay an extra $40.00 for the privilege of transferring your balance. Transferring $1,000 from a credit card charging 15 percent interest to a new card offering a zero percent interest rate can potentially save $150 annually, but paying a transfer fee of $40 and/or failing to repay the transferred amount within the interest-free period reduces potential savings.
Checking your existing credit card's annual percentage rate (APR) against the APR for the new card provides a more accurate estimate of potential savings. The APR is included on your existing credit card's billing statements and on new credit card offers. Before committing to a new card, carefully consider the membership fees, balance transfer fees and any other fees listed in the offer.
And for those prone to problem spending, professional credit counseling can provide a safer method of debt consolidation.