6 steps to a successful credit card balance transfer

By Jeremy M. Simon and Emily Starbuck Gerson

A promotional offer to transfer your balances to a credit card with a lower annual percentage rate may seem like the solution to your problems. But before you make the jump to consolidate your debt onto a new credit card, it's vital to be aware of the fine print and potential pitfalls. Ignorance could turn out to be a very expensive mistake.

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Mike Sullivan is the director of education for Take Charge America, a national nonprofit consumer credit counseling company based in Phoenix. He says balance transfers can be beneficial if done properly, but aren't always worth it. "The only real, solid, definable benefit from a balance transfer is you can save money over the long haul if you pay back the previous amount you owed and you pay it at a lower interest rate including all your costs," Sullivan says.

Here are six steps you should take to make sure you’re on the winning side of a balance transfer:

1) Figure out why you're in debt. "The balance transfer itself is an indication you have too much debt, and if you do, transferring it somewhere else may save you a few dollars, but it may also be a sign you are in trouble and have a bigger issue," Sullivan says. "I often advise people to take care of underlying issue first." Meet with a credit counselor to create a budget and cut back on spending before transferring balances.

2) Beware uncapped balance transfer fees. "It used to be that there was a limited fee, such as 3 percent of the first $1,000, or it was waived completely," Sullivan says. That may no longer be the case, however. Recently, credit card issuers have been eliminating the cap on balance transfer fees. For example, there used to be 3 percent balance transfer fees, but they would be capped at $50 to $75. If you were transferring a balance of $15,000, that seemed a reasonable fee. In 2008, many issuers eliminated those caps. Now, a 3 percent balance transfer fee on a $15,000 debt is $450. Read the fine print closely and do the math to see if the transfer fee will wipe out any possible savings.

3) Avoid using the card for purchases or cash advances. Most credit cards grant a grace period on purchases only if you have completely paid off your previous balance. Because you are using this new card as a loan, that is not about to happen. "If you use the card for purchases or cash advances, your payments are applied first to the low interest balance transfer," Sullivan says. "If it takes you a few years to pay off the balance transfer, your cash advances and purchases may be sitting there accruing interest at 5, 10 or 19 percent, so using it can be very risky." Sullivan reminds consumers that the teaser rates are just that -- they are good for a limited time only. Also, you will lose that rate if you're late on a payment or go over the credit limit. Changes to credit card regulations, passed late in 2008, will limit this practice, but those rules do not go into effect until July 2010. In the meantime, it makes more sense to keep a balance transfer card devoted exclusively to repaying debt. Put new purchases on another card.

4) Beware of the bait-and-switch element, as Sullivan calls it. This happens when you receive a balance transfer offer that you've been preapproved for one amount, but when you submit the application, you find out you're actually eligible for a lesser amount. "If you intend to transfer all balances to this card, you may still find yourself stuck with debt," Sullivan says. "And you just increased your credit limit significantly, which will have an immediate impact on your credit score. If you're about to buy a home or car or using credit for something else, you have to take that into account."

5) Shop around for the best rate. Sullivan says it's important to make sure you're getting the best rate you can. "Finding the right card is probably the best thing you can do. Teaser rates are fine, but I suggest going to Web sites and seeing which cards offer which rates. You may think that 9.9 percent APR is good, only to find out you qualify for 4.9 percent." Consider maintaining several credit card accounts. In its December 2008 report, "What's draining your wallet? The real cost of credit card cash advances," nonprofit organization the Center for Responsible Lending urges borrowers to use separate cards for borrowing at a promotional rate, purchases and cash advances in order to first make payments to the card with the highest APR.

6) Destroy the old and new card. Closing the old credit card account "is a good long-term solution, but in short-term, that impacts your credit score, so I don't suggest it right away. Cut up the card instead," Sullivan says. He also suggests destroying the physical card on the new account, so you won't be tempted to use it for purchases or cash advances (read tip No. 3) -- strictly use it to pay off the balance. "We see too many of those folks who just can't control their impulses," Sullivan says.

See related: Everything you need to know about balance transfers, How to cancel a credit card, Balance transfer calculator, Glossary of common credit card terms

Updated: December 31, 2008

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