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Nilton Porto

MBA/Ph.D., Assistant Professor, Family Finance, Human Development & Family Science, University of Rhode Island

When done properly, credit card balance transfers are a powerful financial strategy for consumers. The main goal is to save money by transferring a high interest debt into a low interest option. As everything else in the realm of debt and lending, a good credit score is key to get the best deal available. Balance transfers present a risk to the new credit card issuer; somebody using this feature already has a balance they are unable to pay in full at the existing terms (hopefully, due to unforeseen circumstances and not just spending habits). So, the new issuer relies on the credit score to assess the odds the cardholder will be able to payoff the balance and become a profitable client in the future.

The optimal strategy is to open a new card that is offering a 0% Intro APR on balance transfers for at least one year. A one-time transfer fee of 3-5% usually applies so always a good idea to run a few figures before choosing to transfer a balance. For instance, a $3,000 transfer will incur a $90 fees – compare this cost with the APR of the original card to check if the savings are worth the transfer. Next, it is important to keep the new card safely tucked away at home and away from any shopping temptations. New purchases might be charged a higher APR and payments will most likely be applied to the 0% balance transfer amount first. Some cards also offer a low or zero introductory rate on new purchases but better to focus on paying off the existing balance first.

Next, work out a plan to pay off the balance transfer before the introductory rate is up. Just $206 per month will take care of the new $3,090 balance in just 15 months. Weekly payments of $50 would do the trick as well. After successfully paying off balance transfer and saving quite a bit of money from the original high interest card, the last step is to forget about the whole process ever took place. Balance transfers should be a worst-case scenario practice. It is easy to get it wrong by not changing spending habits or not keeping up with payments. Always better to pay off credit cards bills in full and to keep improving credit score to access even cheaper debt in the future.