In part 1 of this series, I wrote about how much money you would potentially save by making use of a 0% APR balance transfer (BT). At the time, I was expecting to write part 2 about how to make use of a balance transfer when you don’t have any credit card debt. However, I will now cover that in part 3 and address the issue of balance transfer fees in the current part. This part will attempt to answer questions like: Is a balance transfer worthwhile if the credit card charges a fee of 3%? How much would I earn in this case? At what point do the fees become greater than the gains?
We will consider the same scenario again: you have a 0% APR offer for 12 months on your new card and you want to save money by transferring your balance from a card that is charging you a 10% APR to this 0% card. But, unlike the last time, your new card is charging you a 3% BT fee. Usually there is an upper limit on the fees (usually $75, sometimes $100). Let us see what happens in this case.
How much would you save?
Let us assume that you were planning to pay off the balance on the 10% APR card uniformly over a period of one year. Last time we saw that if you have $5000 on your 10% card, you could save about $280 ($275.2 to be exact) over a 12 month period. However, with the fees (for $5000 it will be $75), your savings will be about $200. The savings are graphically shown below for all amounts from $500 to $5000.
Lessons from the graph are:
- For small amounts the gains are very small even without any fees. With fees they can be extremely small (read: not worth the trouble). For example, for $1500 transferred with a 5% BT fee, you will save only $7.56 ! ….yeah fees are never good :). If I were to use such an offer, I would be interested only if my balances were above $2500.
- Since fees are capped at a maximum of $75, savings for both 3% BT fees and 5% BT fees are same for higher amounts.
- There is another catch with transferring smaller amounts. The savings shown in the graph above are after assuming that you will take the full 12 month advantage of the 0% APR offer. However, if you are looking to transfer smaller amounts, you might be better off by just paying them off on your old card in a couple of months. For example, look at the graph below.
It shows you the savings per month when you transfer $500 from a 10% APR to a 0% APR card. There is a 3% BT fee ($15). It is clear that the savings are more than the fees ONLY if you cannot pay off the balance for more than about 6 months. So if you can make payments of about $84 a month, I would suggest paying the $500 off instead of using the balance transfer offer. I know it is getting a bit complicated here but make sure you understand the implication of BT fees; read this stuff three times if you want to :).
- If you are looking to transfer about $5000, then look at the graph below.
Clearly, the savings become more than the fees after the first two months. Now, a balance transfer with fees will make sense this case because (normally) it is highly unlikely that you will pay off $5000 on your 10% APR card in two months.
I am summarizing a crude rule of thumb (Golbguru’s Balance Transfer Rule if you like :)) you can use:
-Don’t bother yourself with a 0% BT offer, that charges fees, unless you are looking at about $2000 to transfer. If your current card charges an exhorbitant APR (like 20% ~ 25%), again don’t bother unless you intend to transfer at least $1000.
There is another way of looking at balance transfers: you use one credit card company’s money to pay another credit card company, while you can keep your own money in a high-interest account. If you go through all of the above with this logic, you will reach the same conclusion.
Please feel free to share any experiences/cases where you feel this line of thought does not apply.