How Balance Transfers Save You Hundreds Of Dollars
If you have debt on a credit card with an interest rate in the teens, taking advantage of a 0% balance transfer save you $100 or more in interest for every thousand dollars you transfer to a new 0% card.
If you don't know about balance transfers, here's how they work in a nutshell. You apply for a credit card with a 0% promotional rate that lasts for a year. When your card arrives in the mail, transfer your balances from your high interest cards and you'll pay no money on interest during the first year.
During the 0% period, money that you would have wasted on interest payments can be used to reduce your outstanding balance. This not only saves you money in the short term, but can reduce the time it takes to get out of credit card debt substantially.
Here's a good example: a person with a 14% interest rate and $5,000 of credit card debt that makes $200 monthly payments will spend $588 in interest during the course of a year and reduce their debt to $3200. If that same person utilized a 0% balance transfer and made $200 monthly payments, their debt would be reduced to $2750 by year's end. The person who used a 0% APR credit card would have 25% less debt than the person who paid the standard interest rate-not to mention nearly half a grand in extra cash.
In the calculation above, I took balance transfer fees into consideration. These fees are generally three to five percent of the balance transferred and, while they eat away at total balance transfer savings, I like to consider them as the real rate you get with a 0% balance transfer. Thus, if your new card charges a 4% fee, you are basically paying 4% interest during the year-10 whole percentage points less than the 14% rate you may have been paying before.
