We’ve all seen that piece of mail 0% APR! Transfer your balance today! Well, that offer may not necessarily save you money. There are other factors besides the low APR that you should take into consideration before transferring over your debt to another credit card that seems to be giving you a great deal.
These other factors are: What is your current APR? What is the cost of the balance transfer? How long does this promotional offer last? What will be the amount of your new minimum monthly payment? What will be the increased APR after the promotional offer has ended? Can you earn points or dollars for this balance transfer?
Let’s examine these questions in more detail. Obviously, a zero APR is lower than what you are currently being charged otherwise this offer wouldn’t be so appealing. But what you need to consider is how long this offer is in effect. Usually these promotional offers only last about 6 months. So you need to multiply the amount of your current monthly finance charge by the length of the low APR offer to find out the amount of money you will be saving. For example, if the APR that you are paying now accrues a finance charge of $50 per month and the 0% APR offer lasts 6 months. You will be saving $300 by switching over.
However, you will also need to consider how much you are spending on the balance transfer fee in order to get this great offer. Currently, Discover card is charging a 3% balance transfer fee with a minimum of $10 to a maximum of $75. American Express has the same 3% fee with a minimum of $5 and a maximum of $99. So, if you are transferring one card, you can spend up to $99 for that transfer, lowering your savings to $201 instead of $300.
Keep in mind that once this 0% APR offer has expired, your APR could increase to a higher rate than you currently have. You could continue to transfer this same balance to another credit card with a 0% APR offer. But the balance transfer fees will continue to eat away at your original savings amount and eventually cancel out the benefits of switching over to a 0% APR.
Some cards like American Express offer points or rewards for switching over your balance. That can add a small amount to your savings, but depending on your situation, you will have to determine whether or not it is a big enough incentive.
Another factor you should consider is the minimum monthly payment. Your monthly responsibility will increase as your APR decreases. You could be paying up to 3% of your balance each month. If that is not a feasible amount for you to undertake, then switching is not a good option for you.
If you do end up transferring your credit card balance to the new lower APR, be very careful that you are not late or miss any payments. If you miss a payment, your APR will return to a much higher percentage (18-20% and up) and you lose the promotional offer. Credit card companies are unforgiving when it comes to this.
So, don’t be duped by the 0% offers. Do your research. Calculate your costs vs. your savings. Then make your final informed decision.