Are you in debt but have never thought about paying it off faster by reducing your debt obligations? You should…
I am still on the edge about whether or not to do balance transfers. I have three credit card that have a total balance of $2037.84. I am wanting to it off completely within 6-8 months. My annual APR’S are 20.24%, 10.25%, and 22.90%.
I have no doubt that I will be able to pay off within 8 months and I always pay my cards on time.
I just can’t figure out how much I would pay for the transfer fee (whether it was 3% or 5%) and how much I would actually save with 0% interest on balance transfers.
Though the precise calculation needs a fair bit of specifics that aren’t provided here, we can make some assumptions and still make this exercise worth while. We will assume that the total balance is spread out on the three cards and therefore having an annual APR of 17.80% with a rough monthly interest rate of 1.48% (I know this isn’t technically correct, but this is adequate for making the point). We will further assume that Danielle, the reader, is going to pay an equal amount for 8 straight months to pay off the entire balance.
3% Balance Transfer Fee
If she signs up for a 0% balance transfer credit cards having a transfer fee of 3%, she will pay $61.14 on her balance of $2,037.84. Her balance then becomes $2098.98, and she will have to make $262.37 each month to pay it off.
Will the 0% balance transfer win out? Let’s see what happens if she makes $262.37 a month on her cards with interest.
Again, assuming an interest rate of 1.48% per month:
After month 1: her balance will be $1,805.63 (Original balance of $2037.84 + interest minus her payment)
After month 2: $1,569.98
After month 8: $81.03
So, after 8 months and making the same payment, she will still have $81 in her account. Therefore, we can conclude that a 3% balance transfer fee is worth taking.
What About 5%?
If the balance transfer fee is 5%, her total becomes $2,139.73 or $267.47 a month for 8 consecutive months. Using the same method, she will be left with $38.05 after 8 payments at the same interest rate.
Either way, signing up for a 0% card works out.
Wait, The Math Makes No Sense
You may be wondering why you actually have less of a balance with a 5% balance transfer fee up front. This is because in the calculation, I’m assuming that Danielle can muster up $5 more towards principle every month if she opts for a 5% balance transfer fee. Though I don’t know how much Danielle makes, it’s safe to say that she can find $5 more each month from somewhere.
Sometimes, It’s Not Just the Numbers
Even though the math makes sense, don’t jump in just yet, as Danielle might be better off keeping her cards the way they are. Personal finance is a little mathematics coupled with a dose of psychology. As you can see from the example above, the more you are able to pay each month, the lower the balance. You may feel like you are getting ahead by signing up for a 15 month 0% interest rate deal, but if it means delaying your debt repayment and more splurges, it probably isn’t worth it.
On the other hand, if paying 18% APR makes you mad and allows you to cut out a luxury or two to pay off your debt (or better yet, find some ways to make a buck or two extra), what harm is there to pay more interest temporarily?
Know yourself, and which way works for you will become clear.