In the prior installment of this series, we listed several approaches to debt consolidation. For this third post, we’ll be turning a critical eye toward the first one on our list, the popular credit card balance transfer.

At a high level, evaluating and using a balance transfer follows a 7-step process:

1. Gathering information about your current cards
2. Finding balance transfer offers
3. Understanding the terms of a balance transfer offer
4. Crunching the numbers
5. Making a decision
6. Things to do after the balance transfer takes place
7. What not to do after the transfer

Let’s take a closer look at each…

1. Getting Your Current Credit Card Debt Numbers

For each credit card you owe money to, write down its interest rate and balance on a separate sheet. You’ll use this information later when you run the numbers on your current credit cards vs. having your debt consolidated onto a different one.

2. Finding Cards with Balance Transfer Offers

This is the easy part. There are many websites online that offer catalogs of all kinds of available credit cards. One of the better card catalog sites is CreditCards.com. It has a pretty large selection of balance transfer cards to choose from.

All you’ll need to do for this step is to just browse the list of balance transfer cards and write down the names of those that catch your eye.

3. Understanding the Terms of the Balance Transfer Offer

Banks love to stuff all kinds of gobbledygook in their fine print. Luckily we’re only looking for a few key pieces of information. For each offer, write down the following on your sheet of paper:

• Introductory interest rate on balance transfers. You have to pay extra attention to ensure you’re writing down the right rate. Almost all credit card issuers have separate interest rates for balance transfers vs. purchases vs. cash advances.
• Duration of introductory balance transfer rate. Traditional durations will be 6 months to 1 year.
• Balance transfer fee structure. This fee is usually expressed as a percentage of the amount transferred up to a maximum dollar amount. Beware though, not all balance transfer offers will have a cap on the amount of the fee. The lack of a cap may not necessarily be a bad thing depending on how the math works out in the next step. An example of a common balance transfer fee is 3% of the transferred amount, not to exceed $75.
• Interest rate after introductory period ends. This number can make or break the case for transferring a balance to a particular card.
• Annual fee. Most credit cards these days have no annual fee, but it’s still safe to not take that for granted. In the off chance there is, this dollar amount needs to factor into the analysis.

4. Crunching the Numbers

Here you’re interested in knowing the amount of money you would save if you consolidated your debts onto another credit card. To see how much money a particular card offer would save you, plug in the numbers you’ve been writing down into this balance transfer calculator. Record the results you get for each card.

5. Making a Decision

Undoubtedly, the calculator will show you some cards that will save you money. Look through the list of candidate cards you’ve been writing down to identify which one will save you the most. Once you’ve found it, this does not necessarily mean however you should now go out and apply for that card. Only apply for the top card on your list if the amount it saves you is greater than any of your other available debt consolidation options.

6. Things to Do After the Balance Transfer is Initiated

Upon approval of your credit card application, continue to pay the minimum on your existing credit cards you’re going to transfer until you see the credit on those accounts happen. Reason being is that your new credit card company will mail checks to your current credit cards, which could take 7-10 days or more.

Also, to be on the safe side it is a good idea to set up automatic payments for your new credit card. Here’s why: if you miss a payment due date, the new credit card company may use that as an excuse to nullify your low interest rate and replace it with a hefty “default rate”. By setting up automated payments, you won’t have to worry about that happening.

If your bank has an online bill payment service, you can likely set up the automated payments there. Otherwise, most credit card companies allow you to set up an automatic draft from your checking account each month for the amount you specify.

7. What You Should Not Do After the Balance Transfer

The main thing to avoid is making purchases on the new card. Many cards have a different interest rate for purchases, and your credit card company will apply your monthly payments to the portion of your balance with the lowest interest rate. This portion will very likely be your balance transfer, leaving your new purchases to get dinged with a hefty double-digit interest rate. The only exception to this rule is when the card’s purchases APR is at least or lower than the balance transfer APR.

Another argument against making purchases on the new card is the risk of accidentally going over your credit limit. The new credit card company will also use this event as a reason to replace your low rate with their “default APR”, which is oftentimes 20% APR or more depending on the card.

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