Would a Balance Transfer Make Sense for You?

There’s been a fair amount of discussion lately about the ups and down of credit card balance transfers and whether they’re effective debt-elimination tools, particularly in light of some of the changes taking place thanks to the Credit CARD Act. Here’s a look at the basics of understanding balance transfers and determining whether one might work for you.

What Is a Balance Transfer?

Actually, it’s pretty much what it sounds like: when you transfer the balance you owe on one credit card to another card. In other words, you apply for a new card, use that card to “pay off” the debt on the old card and then make payments to the issuer of the new card.

Why Would Someone Do That?

Credit card issuers have attracted transferees by offering them low introductory rates and (in some cases) minimal fees to transfer a balance. If you’re trying to pay down your debt, transferring a card’s balance to a card with a lower interest rate might make financial sense.

Could a Balance Transfer Work for Me?

This is where the issue gets tricky. There’s no set-in-stone answer; the truth of the matter is that you have to do some number crunching in order to determine whether or not a balance transfer could save you money and help you eliminate debt. If you’re pondering this question, start with these steps:

Determine your current credit card’s interest rate and exactly how much money you owe on that card.
Figure out any fees associated with a balance transfer. According to this article from bargaineering.com, the fee is usually a percentage of the amount you want to transfer.
Find out the promotional interest rate on the new card (which will often hold for about a year) and the regular interest rate that you’ll be charged once the promotional period ends.

These numbers are key to answering the question of whether or not to transfer your debt. And the next factor is essential, too: Will you be able to pay off your debt within the promotional period?

Yes, I can pay off my debt before the promotional rate runs out. In most cases, it seems, it makes financial sense to transfer a balance if you’ll be free of the debt within the promotional period. But don’t just guess on this—determine exactly how much money you plan to put toward the debt each month, add in the transfer fee, and see if that adds up to what you owe (on cards with a zero percent introductory rate).
No, I can’t pay off my debt before the promo rate expires. This situation is a little stickier and requires slightly more complicated math. First, determine how much per month you’ll pay toward this debt. Then, figure out the yearly interest rate (APR) that equals the promotional interest rate (i.e. if the promo rate is effective over 12 months, that is the APR; if the promo period is different, divide by the number of months it’s effective and multiply that number by 12). Remember to factor in the transfer fee. If that rate is higher than the rate you’re currently paying on your card, forget the balance transfer—it won’t save you money. If the post-promotional interest rate is lower than your current one, the transfer makes sense. If it’s higher, see the bargaineering.com article for detailed calculation instructions.

Get Free Credit Report!