When searching for credit card balance transfer offers online, one of your main considerations should be the “balance transfer APR,” otherwise known as the “balance transfer interest rate.”
After all, a high APR tied to your existing credit card(s) is probably why you’re looking into balance transfers to begin with. So if the balance transfer doesn’t lower your APR significantly, there’s no point in going through with it.
In short, a credit card balance transfer allows you to move debt from one credit card to another to save money on finance charges (interest), which are borne out of high APR.
If you’re not sure what APR stands for, it’s annual percentage rate, which is the rate of interest you must pay for carrying a credit card balance annually. Finance charges are only charged if you don’t pay off your balance in full by your credit card grace period. So if you’re “carrying a balance” beyond that date, you’re paying interest to do so.
Let’s look at an example:
Existing credit card balance: $5,000
Present credit card APR: 19.99%
Balance transfer offer: 0% APR for 12 months, 9.99% APR thereafter
Balance transfer fee: 5%
In this example, you’d be paying roughly $1,000 in finance charges annually on your $5,000 in credit card debt, or about $83 monthly (using simple math). The APR of 19.99% means you pay roughly 20% of your balance each year.
That’s not good, especially when there are 0% APR balance transfer offers out there for the taking.
Assuming you accept such an offer, your balance would immediately climb to $5,250, thanks to the associated balance transfer fee, but you wouldn’t pay any interest for a full 12 months because of the 0% APR.
The savings using the credit card balance transfer are pretty significant because you’d be going from paying nearly 20% APR to a much more favorable 0% APR.
Of course, if you don’t pay off the debt in full in 12 months, you’ll be subject to finance charges again once that 9.99% APR kicks in.
It’ll still be cheaper than your previous APR, but it’s not as favorable as a 0% interest rate, which accrues zero interest.
Balance Transfer APR is Usually Promotional
Keep in mind that most balance transfer APR is promotional, meaning it only lasts for a set period of time, whether it’s six months or 15 months. You should know how long it lasts so you can make a plan to tackle the debt.
For instance, if you wanted to pay off all your debt during the zero interest (0% APR) period, you’d have to make payments of about $438 a month in our preceding example.
If you don’t think you’ll be able to pay off your balance within the promotional APR period, be sure to consider a balance transfer for the life of the balance, which will lock in a low fixed APR for the life of the balance.
The APR probably won’t be 0%, but it should be something below 5% APR, which may be cheaper than the 0% APR offer (assuming there aren’t any balance transfer fees) over the long term.
