Calculate Your Savings on Balance Transfers
If you’re paying high interest rates on your credit card balances, you may be missing out. Many people are saving lots of money by transferring balances from high interest cards to new ones with low introductory rates. Known as balance transfer credit cards, they can be a great tool if you use them correctly, but you have to make sure you’re doing the math. We’ll show you how it works.
Jenny is paying too much interest on two of her credit cards, and she wants to take advantage of the savings by doing a balance transfer. Here’s a look at her current situation:
Jenny has one credit card with a $7,200 balance and 17.99% APR. She has another with a $2,350 balance and 19.99% APR.
Jenny found a balance transfer credit card with a great teaser rate, and an outstanding introductory period. Here are the details:
- 0% interest on balance transfers for 18 months
- 11.99% Standard APR after that
- 4% Balance Transfer Fee
Jenny’s new card came with a $10,000 limit. That was enough to accommodate the balances on both of her other cards, including the balance transfer fee of 4%. She transferred both her balances to the new card, resulting in a total debt of $9932 on her new balance transfer credit card.
In order to pay off the balance transfer during the introductory period, Jenny will have to make regular monthly payments of $552. That’s quite a bit higher than her combined minimum monthly payments of $191 on her old cards, but she was already paying more than the minimum and she’s prepared to make sacrifices to get out of credit card debt.
Even after the balance transfer fee, Jenny is saving over $500 she would have paid in interest to her other cards over 18 months. If she tightens her belt, she can pay off her credit card debt during the introductory period without accruing any additional interest.
There are a few other factors you’ll need to consider when calculating how much you could save with balance transfer credit cards.
- Some banks charge retroactive interest if you don’t pay off your balance transfer during the introductory period.
- Making purchases on your balance transfer credit card can hurt you. The APR for purchases may be different, and the way the bank applies your payments could result in your purchases sitting around, racking up interest until your balance transfer is paid in full.
- Making one late payment or having a payment returned for nonsufficient funds could result in the loss of your introductory rate, and could even trigger the penalty APR.
The savings you could achieve with balance transfer credit cards will depend entirely on your specific situation. Always compare card offers to get the best deal, and use a balance transfer calculator to figure out how much you will save.
