The amount of money that can be saved with a 0% balance transfer can vary tremendously. Monthly payments, current rates and transaction fees are the primary variables that impact savings.
Monthly Payments
Monthly payments have a huge impact on how much savings a 0% APR will create. Size and timing both play a large role. In general, the larger your payments and the sooner you make them will reduce total savings. This is a good thing, as it means you are erasing your debt.
The timing of your payments, especially large ones, is something that may negate the value of doing a balance transfer. For example, if you can afford to pay off your debt within two or three months, the fees charged on balance transfers will likely outweigh the money you save on interest. If you are in this situation, you may be better off not doing a balance transfer.
Paying close to the minimum every month will generate the most savings, but is not advisable. Even though you aren’t being charged interest, you eventually will be. Thus, even though paying more every month decreases overall savings, the best strategy is to pay as much as possible so you can bring your debt level down as much as possible before standard rates kick in.
Current Interest Rates
The interest rate being charged on the card or cards you transfer balances from will have the largest impact on your overall savings. Obviously, the higher your APR is now, the more you can potentially save by moving that debt onto a card that charges a 0% rate.
If you have debt on multiple cards with different rates, you’ll want to transfer balances from higher rate cards first, especially if you don’t get a large enough credit limit to accommodate your entire debt. Then, focus your payments on the debt remaining on your high interest cards while paying the minimum on your 0% card to minimize interest expenses.
The interest rate on your card should also play a role in your decision making process. For example, if you have a fixed rate card with a single digit interest rate and know you will need years to pay off your debt, you might be better off skipping the balance transfer and sticking with your current card. Even the longest 0% balance transfer rates last less than two years and after these promotions end, you will likely have a variable rate that is in the low to mid-teens.
Transaction Fees
Balance transfer fees have an easy to quantify impact on balance transfer savings. For example, if a credit card charges a 3% fee and you transfer $3,000, you’ll pay a $90 fee. A good, though imprecise way of analyzing balance transfer fees is to think of them as your interest rate. For example, if a card offers a 0% APR for one year and charges a 3% fee, your APR will essentially be 3%.
On a longer transfer, the fee translates into a lower APR. For example, if a card offers a 0% APR for 24 months on balance transfers and charges a 5% fee, this is roughly a 2.5% APR. In this case, the upfront fee is higher, but your rate over the duration of the transfer is lower.
If you’d like to know how these factors will impact you, please see our balance transfer calculator.
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