Here’s the situation. You’re carrying
a $1300 balance on a credit card with a
14% interest rate with no annual fee. You’ve
been offered a chance to transfer that balance
to a new card with a 3.9% introductory rate.
Should you do it?
On the surface, it seems like a no-brainer.
You’ll be trading a 14% interest rate for
a 3.9% interest rate. If that’s all there
was to it, you wouldn’t even have to do the
math to know that you’re saving money. Want
to know how much? Here’s how.
First, you need to figure out how
much you’re paying in interest now. Interest
rates are figured as an Annual Percentage Rate –
APR. So you’re currently paying 14% of $1300
each year that you carry that balance on your card.
That’s $182 (multiply $1300 by .14) for a
year. To find out how much you’re paying in
interest fees on that money per month, divide that
number by 12 to get $15. It’s costing you
$15 a month to carry that balance on your card.
At that rate, you have to pay $15 a month JUST to
keep your credit card balance from going up. If
you’ve budgeted $25 a month for payments on
that credit card, you’re actually only putting
a $10 dent into your balance per month. (That’s
rough. Actually, the second month you’ll be
paying on $1,290 instead of $1300, so the interest
is a few cents less, etc. For the sake of keeping
it simple, though, we’ll work with those figures.)
Now let’s take a look at what
happens to your payments on the 3.9% card. Again,
multiply the amount by the interest rate to come
up with the annual cost: $50.70. That works out
to $4.23 per month – a substantial difference.
You save $130 by transferring your balance.
Wait though – that
rate is only good for 9 months. After that the interest
rate goes up to 11%. So for the first 9 months,
you’ll be paying $4.23 – for a total
of $38.07. The next three months you’ll be
paying an interest rate of 11%, or $143 annually
- $11.91 per month. The total cost of your $1300
balance for the last three months is $35.73. Add
that to the first 9 months, and the cost of your
transfer has just gone up to $73.80. That’s
still considerably less than the $182 you’ll
pay annually on your higher interest rate card.
Let’s toss in one more complication
– an annual fee of $49. Now
your cost after the transfer is up to $123.87. If
you have to pay a transfer fee to your old credit
card company, add that on, too. Even so, you’ve
saved $60 by making the balance transfer.
So it looks like a definite
case for transfer, right?
Not quite. Let’s look at what
happens AFTER the first year. Now you have a credit
card with a $49 fee and an 11% interest rate. If
we stick with the $1300 balance, your annual interest
payment on that will be $143. Add that to the annual
fee and you have an annual cost of $192. Your cost
on the same $1300 at 14% interest was $182.
The bottom line is that every
case is different. The only way to be sure
whether to transfer a balance to a credit card with
a lower rate is to run the numbers. Do the math
to see if you’ll save.
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