Tales from the Transferred Balances

It was a dark and stormy night. By the soft glow of an excel spreadsheet a young girl gathered up her credit card statements. The faint sound of key clicks could be heard all around as fingers typed numbers in quickly... then... all of the sudden... the sum function appeared on the screen. Her finger hovered over the enter key for just a moment before revealing the terrifying truth... The girls existing balances were on the order of $19,000 with interest rates ranging from 19.80% to 29.99%! She shrieked and immediately ran for the door, but soon realized there was no escape. The only way she could get out (of debt) alive was to beat these monsters at their own game. It was time to pull out the secret weapon: balance transfers.

A balance transfer is a powerful tool if used wisely. However, failing to understand your balance transfer can be deadly cost you more in the long run.

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The main things to consider when selecting a balance transfer:

• Promotional APR
  This is what they are going to use to lure you in. This might be 0% or it might be 9.99%. As long as its lower than your current APR you might want to consider it, but BEWARE...
  
  
• Transfer Fee
  These usually range from 0%-5% of the balance you plan to transfer. Try to avoid paying any transfer fee if possible! If you have to pay a transfer fee, do the math: for a transfer fee of X%, Transfer Fee= 0.0X times Balance to be Transferred. Is it worth it to tack on that Transfer Fee to your existing balance? It depends. What is the offer end date?
  
  
• Offer End Date
  These low to 0% APR offers will last anywhere from a couple of months to the life of the balance transfer. If you can get a balance transfer with a low APR for the life of your loan you are in luck! BUT you still need to be very careful not to charge anything else to this card or else lose all benefits. If the APR is not fixed, what is the offer end date? Will you be able to pay off the balance by the offer end date? If not you need to take a serious look at the Standard APR.
  
  
• Standard APR
  Be sure you know what the standard APR will be once you promotional offer ends. If it is higher than your original APR you are probably not making a good decision. Its also important to find out whether or not this rate is fixed. Most likely it isn't. This means that your rate could change. Ask questions to find out what conditions it might change under.
  
  Does it vary with the prime rate?
  This isn't such a bad thing. Prime rate changes are usually on the order of a quarter percent. Even several of these per year won't lead to a huge increase.
  
  Is there a "Universal Default Policy"?
  Use extreme caution if this cards rate varies due to Universal Default Policy! The following factors could easily increase your standard APR (sometimes to 30% or more!) under a Universal Default Policy:
  
• Decrease in Credit Score
• Income Decrease
  
• Over the Limit
• Late Payment
• Bounced Check
• Large amounts of debt
• New credit
• Inquiries for loans
  
  
• Default APR
  Expect this number to be absurdly high and do everything in your power to avoid it!
  

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To simplify this story, lets imagine this girl could transfer only 10% of her original balance, $1900 at the lower end of her APR spectrum, 19.8%. If she made fixed payment of $50 per month, it will take her 59 months to pay off this balance. During that time she will pay $1033 in interest! More than half of what she started with!

How would these balance transfer options effect her total interest payments?

Balance Transfer 1:

• Balance: $1900
• Promotional APR: 5.99%
  
• Transfer Fee: 0% ($0)
  
• Offer End Date: Fixed for life of transfer
  
• Standard APR: 21.24%
  
• Default APR: 29.99%

This is an example of an A+ balance transfer. No transfer fee and fixed APR are key. Just make sure not to charge anything else to this card. All new purchases will have an interest rate of 21.24%. As Banker Girl points out, most cards will apply payments to the lowest APR before the highest. Just don't do it. Cut up the card if you have to. Use the snowball calculator to find out how much you'll save: for example, she saves over $800 in interest (Compared to the 19.8% APR original balance) if she keeps making fixed payments of $50.

Balance Transfer 2:

• Balance: $1900
• Promotional APR: 0%
  
• Transfer Fee: 0% ($0)
  
• Offer End Date: 12 months
  
• Standard APR: 14%
  
• Default APR: 21%

This is an another great offer. No transfer fee and the standard APR is lower than her previous cards. Again, make sure not to charge anything else to this card. Use the snowball calculator to find out how much you'll save: for example, she saves over $770 in interest (Compared to the 19.8% APR original balance) if she keeps making fixed payments of $50.

Balance Transfer 3:

• Balance: $1900
• Promotional APR: 0%
  
• Transfer Fee: 0% ($0)
  
• Offer End Date: 6 months
  
• Standard APR: 19.99%
  
• Default APR: 29.99%

This is offer is not as great as the previous two. No transfer fee is good. However, the standard APR is still pretty high. Use the snowball calculator to find out how much you'll save: for example, she saves over $350 in interest (Compared to the 19.8% APR original balance) if she keeps making fixed payments of $50 for the life of this transfer. This is mainly because the first six months payments can go directly towards the principal balance.

These are three examples of balance transfers that make sense. Never transfer a balance before checking the facts and doing the math! Here is an example of a balance transfer nightmare:

Balance Transfer Nightmare (As currently offered by Discover)

• Balance: $1900
• Promotional APR: 5.9%
  
• Transfer Fee: 4% ($76 on a $1900 transfer)
  
• Offer End Date: 3 months
  
• Standard APR: 26.99%
  
• Default APR: 29.99%

You really end up transferring $1976 because they tack on an extra $76 fee. You'll have that sweet 5.9% for all of three months before your rate is ridiculously high! Consult snowball calculator... If you make fixed payments of $50 per month, this balance transfer nightmare will cost over $375 more than if it had just been left alone at 19.8%.

Moral of the story: Don't let the "Teaser APR" fool you! Check the facts, do the math, and save some money :)

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See also:

• What is Your Monthly Finance Charge?
• Creative Ways to Spend $2700 (My Finance Charges for 2007)
• 7 Strategies to Reduce Finance Charges