How to do a Balance Transfer the Right Way

Tis the season. Balance transfer offers are once again flooding our mailboxes. If, after some overspending around the holidays, you feel the need to get out from under some high-interest credit card debt, a balance transfer could be the way to go. Here’s what you need to know as you consider the offers.

You Need a Plan

A balance transfer should only be considered in the context of a strict plan that you can follow; otherwise, you could find yourself playing balance-transfer roulette, trying to postpone your debt spiral by continuing to transfer your balances. And that can only work if you can continue to qualify for 0% offers. Anything short of a solid plan and the best balance transfer terms would not be considered a good idea.

A balance transfer is a bad idea if:

• You can’t qualify for a low APR. You won’t know that until you apply, so you shouldn’t apply for a balance transfer unless you have very good to excellent credit.
• The balance transfer fee is over 3%. Some credit cards charge as high as 5%.
• You are only able to make the minimum payment. If you don’t pay your balance in full by the end of the promotional period, you will owe interest retroactively on the entire balance transfer amount.
• The promotional period is too short. A 12-month promotional period may not be long enough to fully pay off the balance.
• If you continue to rack up balances on your other credit cards.
• If your credit utilization ratio exceeds 30%, it will hurt your credit score, making it difficult to qualify for new credit.

A balance transfer is a good idea if:

• You can qualify for the 0% APR.
• You can qualify for the longest introductory period – 12 months minimum.
• Your balance transfer fee is 3% or lower.
• You can continue at the same level of payments or higher that you are making on your current credit card to ensure you can pay down the full balance transfer amount by the end of the promotional period.
• You don’t make any additional purchases on the balance transfer card, and you pay your other credit card balances in full each month.

Generally, a balance transfer is a good idea if your financial position is improved at the end of the promotional period (i.e., pay down expensive debt). However, if not properly managed, a balance transfer could worsen your debt situation and hurt your credit. You should only consider a balance transfer if you can stick with a plan to fully pay down the balance before the end of the promotional period.