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5 Tips For Credit Card Balance Transfers

Credit card and a penIt’s a good time to transfer a credit card balance, as several banks are offering 0% APRs for as long as 18 months with relatively modest transfer fees.

But if you don’t follow the transfer rules properly, or you can’t pay the balance back in full before the 0% period ends, you could pay a lot of money in interest, defeating the whole purpose of the transfer.

I transfer balances frequently. Here are some lessons I’ve learned.

Tip: Make sure you have an exit strategy.

If you take out a 0% balance transfer for, say, 12 months, make certain you can pay off the balance in a year or less. Start by dividing the size of the balance transfer by 12, and pay that amount every month.

For example, if you borrowed $5,000 at 0% for 12 months, that works out to $417 a month. Better yet, make it an even $450. And make sure you pay off the remaining balance a week or two before the 0% period ends, just to be safe.

Some people plan to transfer the balance again when their current deal expires. That’s risky. There’s no guarantee today’s deals will be available a year from now. And if your credit score takes a hit, you may not be eligible for tomorrow’s best deals.

Tip: Always choose the offer with the lowest transfer fee.

I’m always on the lookout for a great offer, even if I already have a deal in hand.

That’s why I try to avoid a big balance transfer fee, if I can avoid it.

Let’s say you borrow $5,000 at 0% for 12 months with a 3% transfer fee. Later, you see an offer of 0% for 18 months. It’s going to be difficult to take advantage when you’ve already sunk $150 into the first offer.

While 3% seems to be the going rate on balance transfer fees, some cards – like Chase’s Slate – don’t charge that fee. Other banks, like Citibank, cap fees at $75 or so, depending on the customer and the card. Always read the fine print for the details.

Tip: Don’t borrow to pay off a longer-term loan.

I once paid off a four-year auto loan with a 12-month credit card balance transfer check. I paid off the loan three years early and also got title to my car immediately after I made the transfer, meaning I’d never had to worry about having it repossessed.

Don’t follow this strategy unless you’re sure you can pay it off in time. I had enough money in the bank to pay off the balance.

Tip: Don’t transfer a balance from one credit card to another from the same bank.

Most banks won’t let you transfer a balance from one account to another within the same bank. I tried this and learned an expensive lesson.

Instead of paying off Card A directly with the balance transfer check from Card B, I wrote the check to myself, deposited it in my checking account and then wrote a personal check in the same amount to pay off Card A. I thought that was pretty shrewd, but the bank wasn’t fooled. It charged me the full APR on the new balance, about 15%.

Sometimes you can be too clever for your own good.

Tip: Choose a balance transfer check over a home equity line of credit.

HELOCs are among the cheapest way to borrow, and many people transfer their higher-rate credit card debt to their HELOC.

Many HELOCs today are priced at the prime rate of 3.25% or a little above. Plus, the interest is usually tax-deductible, unlike credit card debt, and you usually don’t have to start paying the principal back for as long as 10 years.

There’s also no balance transfer fee.

But there are huge risks, the biggest being if you can’t pay back the loan, you could lose your home to foreclosure. Credit card debt, by contrast, is unsecured – the worst the bank can do is take you to court and try to get its money back.

Save your HELOC for major home improvement expenses.

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