How And How Much You Would Earn From A 0% APR Offer: Part 2

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:

1. 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.
2. Since fees are capped at a maximum of $75, savings for both 3% BT fees and 5% BT fees are same for higher amounts.
3. 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.

4. 

   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 :).

5. 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.