Deal or No Deal?

have You ever received those offers in the mail for a balance transfer with “rates as low as 0%”?

Exciting and enticing, you currently have a rate of 19.9% why wouldn’t you jump on this offer?!  That 0% rate won’t last forever and after reading the terms and conditions you’re also likely to find there’s a one-time balance transfer fee of 3% to 5% of the transferred amount. You have to do a little analysis before making your final decision. Let’s dive into this more…

What is a Balance Transfer?

The goal of every business is to serve as many people as possible with their great product or service. Financial institutions use balance transfer promotions to attract new customers. The invitation is set up to have credit card holders transfer their balance from their existing institution to the new company. These offers may have promotion or introductory rates, which can help reduce overall interest costs.

The Fine Print

After the promotion or introductory rate expires, the real interest rate is going to apply. The real interest rate may kick in after 3 months, up until 12 months depending on the promotion. One thing to check is if the real interest rate is lower than your current interest rate. If so, than it’s worth considering the transfer offer. If it’s not, than the real question is how disciplined you are and if you believe you can pay off the balance in the allotted window? If you don’t think you can, don’t bother. The interest payments will get you. 

Where you see the real savings with balance transfers is when you transfer to a lower interest rate but maintain the same payment amount. Now if you’ve been paying the minimum before the balance transfer, you may be tempted to just pay the minimum again with a lower rate because you may see it as savings and an increase in cash flow. While that is correct, if you discipline yourself to make more than just the minimum payment on the balance transfer offer, you’ll see your debt go down much quicker. That’s the real savings. 

Many balance transfers have a one-time balance transfer fee ranging from 3% up to 5% of the transferred amount. On a transfer of $10,000, the transfer fee could be anywhere from $300 to $500. Although it may seem like a huge upfront expense, the offer still might have value if what you have been paying in interest works out to be more.

Make sure to read the fine print and do a quick analysis to determine if the offer has real value to you. Always keep in mind that your goal when accepting these offers should be to have your credit card debt paid off by the time the promotion period ends.