Are Balance Transfers Worth It?

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Many Americans regularly receive offers from credit card companies, which offer 0% interest rates on balance transfers. These offers look tempting, but are they worthwhile?

Balance transfers can be a good way to save money on interest charges. However, they could also be an expensive way of moving debt from one card to another if you do not pay the balance in a timely manner. This article will help you determine if a balance transfer is right for you.

Calculate Savings

Before you transfer your balance from one card to another, you need to make some calculations. First, find the length of the 0% introductory offer on the new card. Let’s give an example where the period is 15 months. You will need to determine how much you will pay in interest charges on your current card in a 15 month period. If you can pay off the balance within that time period, that’s how much you will save in interest.

You then need to deduct the balance transfer fee that the new card may charge. Most charge a balance transfer fee of 3%, but the exact rate will be found in the card’s terms and conditions. If you are transferring $5,000 to the new card, a 3% balance transfer fee will cost $150.

Finally, subtract the amount of the balance transfer fee from your potential interest savings to see how much you may save by transferring your balance.

Other Considerations:

You will want to keep these other factors in mind:

  • Check the long-term APR of the new card and compare it to your current card’s interest rate. If it is considerably higher, you may not want to take the risk. You will need to honestly assess how long it will take you to pay off the balance.
  • If you do transfer your balance, you will want to pay off the debt in full during the introductory period. Mark it on your calendar and take every step to make sure the debt is paid off by the due date. Then, you will not accrue more interest charges on the new card.
  • Make your payment on time every month. If you make a late payment, you will likely forfeit the 0% introductory rate and have to pay the card’s normal APR, which defeats the purpose of the balance transfer.
  • In addition to making timely payments, you need to strive to make at least the minimum monthly payment. Again, if you do not make this amount, your payment will be counted as late, and you could lose your introductory interest rate.
  • Maintain a high credit score, especially during your introductory period. If your credit score decreases, your card company could raise the long-term interest rate.
  • Since you are no longer paying interest on your current debt, you may feel tempted to charge more. You will have two cards, and one will have no balance. However, any new debt will accumulate interest, which makes the balance transfer meaningless. Thus, it is important to remain financially disciplined.
  • Another temptation is that some of these cards will also offer a 0% interest rate on new purchases. They offer this because they doubt you will pay off all of the debt during the introductory period, so they can make money off of future interest charges. Thus, it is a bad idea to make new purchases on your card until you have paid off the balance.
  • Most of these offers are geared to people with good or excellent credit scores. Thus, if your credit is fair or poor, your long-term APR may be higher than the advertised rate.
  • Your new card’s limit may not cover the entire debt on your old card. If that is the case, you will need to calculate whether the potential fees will be worth transferring only a portion of the debt.
  • Similarly, even if your card limit is high enough to cover the debt, your issuer may not allow you to transfer the full amount. Thus, you will want to read the terms and conditions to make sure there are no limits on what can be transferred.