How to Calculate If a Balance Transfer Is Worth
If you have more than one credit card, you’ve probably received offers to transfer the balance to one of your other cards – probably one that is less used than the others. Not wanting to be left out, this card sends you a zero interest rate offer for 12, 15, or 18 months, giving you time to pay off your balance without interest, pushing that total over time.
Nice deal, right? But there is always a catch.
This catch isn’t necessarily insidious, as credit card issuers make it clear if they charge a fee to transfer your balance from one card to another.
Let’s take a look at this with an example.
Let’s say you have a credit card with a balance of $ 5,000 and an interest rate of 18%. You pay $ 200 towards this card every month, but you feel like you will still be in debt forever.
But you have a proposal to transfer the balance to another card without interest within 15 months. If you accept the offer, you will pay a 5% commission in advance, which will be added to your total balance.
Should I take it?
How to Calculate Credit Card Interest and Balance Transfer Fees
All you have to do is do some math. And it’s not even the math that you have to do yourself, mostly thanks to technology. I love the Omni Calculator , which shows you how much you end up paying with interest.
In our example, you will pay $ 1,313.60 interest after you make your last credit card payment, almost three years later.
Let’s go back to the balance transfer proposal. To calculate this commission, simply multiply your balance ($ 5,000) by the commission (5% or 0.05). Your balance will be immediately added $ 250, bringing the total payout to $ 5,250.
Seems like a simple solution, right? If you continue the course, you will pay over a thousand dollars in interest; if you transfer the balance, you pay a small portion of that amount.
Additional considerations before transferring a balance
This math wasn’t too tedious, but you’re not done yet.
The zero percent offer does not last forever, and in our example, it lasts 15 months.
If you plan on paying your regular $ 200 a month, you are not going to pay your entire card until the end of the promotional period. You will only pay $ 3000 out of your $ 5250 total. You will have to pay interest on the remaining $ 2,250.
If your “new” interest rate after the zero interest period is higher than on the other card, you may end up canceling some of your savings. Our trusted OmniCalculator says that if you have a 25% interest rate on your $ 2,250 balance and continue to pay $ 200 slowly and steadily per month, you will be charged $ 340.42 in interest.
In all, you will pay $ 590.42 in interest and balance transfer fees before you get out of debt. That’s almost half of the interest you would pay if you left your balance on your original card.
This is still a significant discount, but if you can’t speed up your debt payments after the balance transfer, you still have to pay a bunch of interest. You will have to pay at least $ 350 per month after the transfer if you want to pay off the entire balance before the end of the advertising period.
Even if you are unable to fully pay off your balance during the promotional period, you might still want to transfer your balance. This interest-free period can help you strengthen your finances after a difficult period, or formulate a reliable plan to pay off your debt. Just don’t get into it thinking that a balance transfer will solve all your problems. Think of it more as a temporary incentive to make it easier to pay off your debt.