Everyday Cheapskate: Zero-Interest Balance Transfer Has Its Reward but Is Riddled with Risk
Paying off credit card debt is an uphill battle. If the majority of your minimum monthly payment is going toward interest, that makes the climb even more difficult.
Getting out from under double-digit interest rates with a zero-interest balance transfer can make a big difference, provided you understand the risks.
Dear Mary: May I ask your advice? I have a credit card balance of $4,500 at 18 percent interest. My FICO score is 700. I've been paying the minimum monthly payment for too many years, but I am determined to pay this off in the coming 12 months.
Would it be wise for me to transfer this to a new Chase Slate credit card that offers zero percent interest with no fees for 15 months? Or should I keep what I have, bite the bullet and just pay it off over the next year? -- Mary Beth
Dear Mary Beth: Let's look at the numbers. If you keep what you have and pay off the $4,500 at 18% interest over 12 months, you will make 12 payments of $413 each, for a total of about $4,950, of which $451 will be interest.
If you transfer this $4,500 balance to a 0% card, a quick calculation shows you will make 12 payments of $375 each, saving you that $450 in interest. That looks like a no-brainer. And if that were the only consideration, my advice would be to go with the no interest option and keep $450 in your pocket.
But there are other things to consider -- the risks you're certain to encounter.
Most balance transfer offers involve a fee for moving the balance. A typical fee is between 3% and 5% of the amount transferred. So, for example, you'd be charged $135 to $225 added to the $4,500 balance. That reduces your potential "savings" and would increase your intended monthly payment to about $388, but you would still come out ahead.