You see ads for a balance transfer all the time. They come in the mail, especially addressed with your name. They pop up in ads on your computer screen as you work or check your email. These constant reminders may have you asking yourself, should I use a balance transfer option? The answer might be yes. However, you should look carefully into the details of the balance transfer option before moving your money around from one place to another.

What is a balance transfer

Put simple, a balance transfer is when you take some or all of the amount of money which you owe to one lender and you transfer that debt to another lender. The second lender pays the bill to the first lender and takes on the debt, thereby becoming the sole lender on the amount transferred. Credit card companies offer strong incentives for the balance transfer because they benefit financially from taking on the debt, since any interest paid will now be profit for them.

Understanding interest rates

The main reason to consider a balance transfer is to reduce your interest rates. Interest is a percentage of the balance which is added on to the balance owed each month in the form of a finance charge. The interest is usually expressed in terms of an APR or annual percentage rate, which is divided by twelve (the number of months in the year) and then multiplied by the balance each month. Many times, a balance transfer option will advertise zero percent APR, meaning that no interest rate is charged during the promotional period of the balance transfer.

Switching back and forth

The balance transfer option almost always comes with a limited promotional period. What this means is that you may have a low or zero APR on your balance transfer for four to six months but then the APR jumps up to twenty percent. Before making any balance transfer decisions, you should found out the length of time for which the low balance transfer rate will be in effect and the APR charged after the promotional period of the balance transfer has ended.

Some people keep strict records of when the promotional periods of balance transfer options are due to expire and will balance transfer again to a card with a lower rate just before the promotional period has ended. While this is a good method of keeping your interest rates low, it can reflect poorly on your credit score if you are frequently using the balance transfer option. Instead of making excessive use of the balance transfer option, you should contact the customer service representative at each of your credit card companies and try to negotiate the best interest rate over the longest period of time. In the event that this does not result in a satisfactory rate, you can always use the balance transfer option as a back-up plan.

Responsible repayment

The balance transfer option should not be used to avoid repayment of your credit cards. Instead, it should be used as a method of reducing your monthly bills in order to more efficiently repay any outstanding debt.