Here’s a question from the blog:
“I just received a $5000 balance transfer offer in the mail for the Chase Slate card that has a 5.9% APR for 12 months with a 5% balance transfer fee. I have 6 credit cards all with $1500 to $3000 on them but none of them are maxed out. I am good at making payments, I have only ever missed one and I always pay more than the minimum. However I have a feeling that I should be doing something more to pay off my debt. It sounds like a good idea to move all my cards to this one at a lower rate. Is this a good approach? —– Tiffany, 36 FL”
In finance, there’s no such thing as a free lunch…credit card companies do balance transfers because it makes them money, not to be nice to you. Let’s look at the math from the bank’s standpoint and from yours so you can figure out if the math will work for you.
What’s in it for the bank?
- Transfer fees: These up-front fees can be pretty steep and the 5% in this example is on the high end.
- Balance acquisition: in the competitive credit card business, transferring existing balances can be a quicker way to build up loan balances than waiting for you to charge up.
- Finance charges: sure they’re offering you a low intro rate, but they’re counting on you to keep your balances past the intro period. If you’re reading this column, you probably show a tendency to run credit card balances, so their bet may not be a bad one.
When should you take the bait?
- Current APRs are significantly high. Considering that you’re paying 5% up front just to transfer your money, you need to save substantially on your rates to make this pay off.
- The “regular” APR after the intro period is the same or less than your other rates.
- You realistically plan to pay off all or most of the balance transfer amount before the intro rate expires.
Before you leap
If this describes you, a balance transfer may be for you. But before you leap, call your current card company and tell them what’s on the table. Ask them to match the offer and waive the transfer fees. It’s in their best interest to keep the balances and keep earning money on them rather than letting you go. If they decline, ask for just a straight interest rate reduction.
Don’t confuse motion with progress
There is one thing that you should watch out for and it’s why I’m always hesitant to tell someone to take a balance transfer. Lots of times, we confuse “motion for progress.” We do the transfer and think we’ve solved the problem. We haven’t—we’ve only made it slightly less expensive. If you think you’ve solved the problem, you might take your eye off the ball and run up even more debt than when you started or just not make much progress paying it off. That’s what credit card companies are counting on.