Can Balance Transfers Save Me Money Even with a Transfer Fee?
If you have received an offer for a 0% APR credit card or a rate lower than what you are currently paying, you may be tempted to open the account and transfer your current balance. However, there are a few things to consider before applying for that new credit card. It may not be as good of a deal as it seems.
Is it an introductory rate?
First, you will want to read the fine print to see if the interest rate is only good for an introductory period. Card companies make money by charging interest, so it may be obvious that you will not pay 0% interest forever. However, even interest rates above 0% may be introductory. If you have received an offer for a credit card that charges 3.99% interest, make sure that APR will be your new fixed rate. If the interest rate will go up after the introductory period, check to make sure the ongoing APR is lower than what you are currently paying.
How fast can you pay off the debt?
This next question is especially important if the interest rate is for an introductory period only. The most compelling reason to transfer your balance is to pay off your debt sooner and save money on interest costs. Before opening the new account, you will want to put together a realistic budget to see how much you can afford to pay toward your debt each month. Then, do the math to see if this will be enough to entirely pay off your credit card balance within the introductory period.
How much is the balance transfer fee?
While a handful of cards do not charge balance transfer fees, you will usually be charged 3% to 5% of the amount transferred. Thus, if you move $5,000 to your new card, you will be charged between $150 and $250 in fees. This balance transfer fee is charged as soon as the transfer is made, so this fee, along with any interest you will be charged, should be taken into account before deciding whether to open the new account.
Can you transfer the full amount?
Another consideration is whether you can transfer your full balance. Sometimes, the new card issuer will not offer a credit limit high enough to cover the entire balance on your old card. In this case, your savings may be minimal, depending on how much of your balance you can transfer and the amount of the balance transfer fee.
So should I make the transfer?
While there are a number of calculators online that can help you make the final decision, we will run through two scenarios to demonstrate when a transfer would be helpful and when it would not.
Say you have been offered a credit card with 0% APR for an introductory period of 18 months and a balance transfer fee of 3%. You plan to transfer $5,000 and can pay about $300 each month, which means you will pay off the card during the introductory period. If your current card charges an interest rate of 9%, even when the balance transfer fee is taken into account, you will save over $400 in interest. In this case, it is wise to your credit and your wallet to transfer the balance.
But let’s look at a slightly less optimistic scenario. You are still transferring $5,000 to a card with a 0% introductory rate, but the introductory period is only 6 months (after that, it will be the same interest rate you are already paying, which is 9%). You will pay a 5% balance transfer fee, and you can only afford to make the minimum payment (which will be about $200 per month). In this scenario, you will actually lose money by transferring your balance.
As these two scenarios demonstrate, it takes just a few changes to transform that balance transfer from a great deal to a bad one. Thus, it is important to read the terms and conditions and crunch the numbers before you even consider opening a new card.
If you do decide to transfer your balance, continue to make payments on your old card until the amount has been transferred. It can take up to three weeks for your new credit card to pay off your old card, and you do not want to miss a payment during this period, as it could hurt your overall credit.
In addition, make every monthly payment on your credit card on time. If you do not, issuers can immediately cancel your introductory offer, causing you to lose the opportunity for a 0% APR.