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Tricky balance transfers can trip you up

Checking out those nifty offers to transfer credit-card balances to low-rate cards? Go slowly. The terms and the fine print are tricky, and you get rewarded only if you have the best credit.

By Bankrate.com

Lots of people are looking for ways to lower monthly expenses and free up more cash. Transferring a credit-card balance to a card with a lower interest rate can help.

There are plenty of credit card deals to choose from. But finding a good one takes some work and quite a bit of close reading. Let's sift through some typical offers.

Rock-bottom rates

Call it the big tease. Frequently, credit-card issuers offer rock-bottom introductory rates on balance transfers. These teaser rates tend to last five to nine months.

One card might offer a 2.99% rate on balance transfers, another may boast 0% introductory rates on transferred balances for eight or even 12 months.

You'll need to be an ideal card customer to enjoy these kinds of low promotional rates. One slip-up is all it takes for an issuer to jack up interest rates. Pay late once on some of these cards, and that no-interest deal gets replaced with a 19.99% rate.

New-purchase promos

Other card deals reward you for transferring balances with super-low introductory rates on any new purchases you make with the card.

A typical offer lets you pay no interest on new purchases for six months. Then, you're charged a fixed annual percentage rate of 9.99%, 10.99%, 12.99% or 14.99% (depending on your credit) plus a fixed rate of 9.99% on balance transfers until those balances are paid off.

Keep caution by your side

As nice as all these deals seem on the surface, there's plenty to be wary about. The penalties on these low-rate cards are often severe. And some companies charge a "transaction fee" for the privilege of transferring a balance to their card.

Several issuers offering low rates on balance transfers charge fees of 3% to 5% when you accept their offer. A 4% fee on a $1,000 balance would cost $40. Some issuers cap fees at $35 to $50. Most issuers charge these fees as soon as a balance is transferred onto a card.

"It's really very tricky. They have all these sneaky conditions," says Howard Strong, author of What Every Credit Card User Needs to Know. "You need to be extremely cautious."

Bringing over your balance

Once you've settled on a card offer, you're ready to start the actual balance transfer process. It's important to continue to make minimum payments on your old card while waiting for a balance transfer to take effect, which could take four weeks.

Be sure to close off old credit lines. Otherwise, you may be tempted to charge away on your old cards. Darrin Sandoval, director of operations at Consumer Credit Counseling Service of Greater Denver, sees this all the time.

"They may transfer a large balance to a card with a low rate on balance transfers but they continue to use the old card," Sandoval says. "Soon both cards have large balances on them."

It's also important to realize that not everyone qualifies for the rock-bottom interest rate promised in big bold print. The teeny, tiny print near the end of the credit-card offer explains this.

"It's the old story. The big print giveth and the small print taketh away," Strong says.

So even though the offer might say 1.9% interest rate on balance transfers, you may only qualify for a 10.99% rate.

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Getting your transfer's worth

Let's say you land a super-low interest card deal and successfully transfer a hefty balance onto it. And you remember to close off your old credit line. So far, so good.

For the next six months or so, your credit-card payments will be cut in half. With the money you save you may finally be able to build up a small emergency fund so you'll have some cash on hand should the worst happen and you lose your job.

As nice as having some breathing room in your budget may be, you're not done yet. "That's only the first step," Sandoval says.

The best way to free up more cash for the long haul is to eliminate credit-card debt. You'll need to continue to pay as much as you can on those credit cards.

You'll also want to adjust your spending habits to avoid running up huge credit-card balances in the future. It's all a matter of learning to live within your means.

Sandoval advises people to limit credit-card charges to emergencies and for purchases that can be paid off in 90 days.

Updated Dec. 21, 2007

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