When it comes to credit card debt, balance transfers are worth it if one measure is met: If the balance being transferred has an annual percentage rate (APR) that is lower than its current APR. This is interest rate that is charged on the balance. It doesn't make sense, for example to transfer a balance that has an APR of say 10% to a card where the balance will then have an APR of 12%. However, with that said, the fine print must be read.
Transferring Based On Interest Rate
Often, credit cards give offers to cardholders to transfer balances at 0% APR for a certain period of time. After that time is up, the balance has a predetermined APR applied to it. For example, a card with a 15% APR may allow balance transfers to maintain a 0% APR for 12 months, and then the normal 15% APR applies. This is a situation where transferring a balance to a higher APR card may still be ideal, as long as that balance transfer can be paid off before the higher APR kicks in. Even if a certain portion of the balance can be paid off before the higher rate kicks in, or in a reasonable amount of time after it kicks in, the transfer may still be worth it.
As an example of this, assume that a cardholder has a $10,000 balance with a card that has a 10% APR. Another card has a 15% APR and offers 12 months of 0% interest on all balance transfers. If the cardholder is confident that a majority of the balance transfer can be paid off before the new 15% APR begins, then the transfer should be made. Assume that the credit cards compound the interest on an annual basis. To simplify the calculations, disregard monthly minimum payments. The goal here is to see how much interest is accumulated between the two options. Here is what happens after three years go by with the initial credit card:
10% card ending balance year one = $10,000 + ($10,000 x 10%) = $11,000
10% card ending balance year two = $11,000 + ($11,000 x 10%) = $12,100
10% card ending balance year three = $12,100 + ($12,100 x 10%) = $13,310
Total interest = $3,310
Now, here is what happens with the second card:
15% card ending balance year one = $10,000 + ($10,000 x 0%) = $10,000
15% card ending balance year two = $10,000 + ($10,000 x 15%) = $11,500
15% card ending balance year three = $11,500 + ($11,500 x 15%) = $13,225
Total interest = $3,225
Even with the transfer, after three years, slightly less interest is accrued. The ideal move is to pay off the balance during the 0% interest period, but a certain amount of wiggle room may exist when transferring balances. It is always a good idea to calculate the amount of interest that will accrue over a specific time period to see what the better option is. Keep in mind that sometimes credit cards charge fees to transfer balances, and this adds an element to the breakeven point calculation.