“Dear Steve,
I have one credit card with a balance of $22K and an 8.5% interest rate. I want to pay it off in the next 2 or 3 years or so.
Would it make sense to do a balance transfer to another card that is offering 0% APR on all purchases and transfers until January 2010 and then 9% or after that AND there is a 3% transfer fee? Thank you!
John”
Dear John,
Great question!
Well let’s look at the facts. If you paid $500 per month for the next twelve months at 0% then you will reduce your debt by $6,000 and then you’ll pay 9% on your balance of $16,000. The transfer will cost you a fee of $660.
Paying 0.5% more on your new balance of $16,000 will be a lot less than it would be if you stuck to paying interest for the next year at 8% on the higher balance.
I actually went over and used the Myvesta Credit Card Pay Off Calculator and that told me that on the remaining $16,000 balance you’d need to increase your payment to $734 a month in years two and three to be debt free by the end of the third year.
If you stay with your current card and pay the minimum payment it will take you 354 months to get out of debt and you’ll pay $11,910 in interest.
Every penny you can jam into reducing your debt during the interest free period will save you a lot when you start paying interest again. There still are some amazing 0% balance transfer deals out there for people with good credit scores.
Where balance transfer deals are a suckers game is when you pay only the minimum payment during the 0% period. The bank will string you along with a really tiny monthly payment and then when the interest kicks in, your payment will get huge. Balance transfer deals are nothing more that an inducement, a bribe of sorts, to encourage people to switch to the new bank. However, you can beat the creditors are their own game by using a balance transfer deal to get out of debt for free.
If it was at all possible and you could pay $1,8333 per month then when your 0% period expired you would be completely debt free using the banks own money. How sweet would that be!
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