Debt Free Blog

If you have a credit card, you have almost suredly received some balance transfer or “convenience” checks from your credit card company. These checks are often marketed with credit limit increases to get the borrower to put more debt on their card.

You have to be careful with these offers as there are usually strings attached. Balance transfers usually carry a one time fee of 3-5% of the amount transferred, or a flat fee (whichever is greater). This fee ensures that your credit card company is going to make money no matter what.

Balance transfers are not always bad

Balance transfers and convenience checks are not always a bad idea. They can save you a lot of money in some instances, and should definitely be considered if you have balances with much higher interest rates you could transfer. So how do you make sure you’re getting a good deal?

Formula for calculating REAL balance transfer cost

To calculate whether the balance transfer will be a good deal, you have to look at several factors:

• The amount you are transferring
• Your current interest rate
• Your balance transfer interest rate
• The fee for transferring the balance

Let’s say for example you have a $2500 balance on a credit card at 10% interest and get a balance transfer check from another lender that offers 7% interest for 12 months, and has a 5% one-time fee. Is it a good deal? Let’s see…

1. Let’s calculate the one-time fee for the transfer: $2500×5% = $125
2. Now, calculate the interest we pay currently (per month) at 10%: $2500 x (0.10 / 12) = $20/month interest
3. How much will we pay in interest per month at 7%: $2500 x (0.07/12) = $14.50/month interest

So let’s look at the above scenario… At first, it seems like we might save money by dropping our interest rate from 10% to 7%. After looking at the offer in detail, we see we would only be saving $5.50/month in interest charges and it would cost us $125 in fees just to take the offer. Considering the offer is only fixed at 7% for one year, we would lose a substantial amount of money by taking the offer.

This is an extreme example, but you can see where I am going with it. Be careful when you consider using balance transfer offers or convenience checks. They are a profit center of the credit card companies and are usually not a good deal.