Evaluating Credit Card Offers

Have you ever received an invitation to transfer your high-balance, high-interest rate credit card to a new card with zero percent interest for a year?  Is it a good deal or not?  Like many things in life, it depends. 

I was just asked that by a client who had a $10,000 balance on his credit card, was paying 14% interest and making monthly payments of $250.  The offer that he received in the mail was for 0% on transferred balances for a year, followed by 18% interest after that.

You can go to http://www.creditcards.com/calculators/ and run some simulations on your own.  However, let’s take a look at what we did.  First, we computed the payoff for his current card using the “payoff calculator”.  If he continues to make $250 per month payments and cuts the card up or at least doesn’t use it until it is paid off then he will pay the balance of in 55 months, that’s about four and one-half years, and will pay $3,549 in interest.

Next we looked how much he would have to pay per month at 0% interest.  Remember to take advantage of the low, zero percent, interest; he would have to pay the entire balance off in 12 months of less.  $10,000 divided by 12 months is about $833 per month.  He couldn’t do that.  In fact, paying $250 per month was his maximum payment.

If he converted to the new credit card and paid $250 per month for a year with zero interest  then he would reduce his balance by $3,000.  All of every payment for a year would reduce his account balance.  That way, after a year, when the higher interest rate kicked in his unpaid balance would be $7,000.  Back to the payoff calculator for another look.  Again assuming that he doesn’t use the card, makes the $250 per month payment, and accepts the new 18 percent interest rate he will pay the card off in 37 more months and will pay $2,147 in interest.

The following table summarizes his options.

	Keep the 14% Card	Pay off in 1 Year	Transfer Balance
Interest Rate	14%	0%	18%
Monthly Payment	$250	$833	$250
Months to Pay Off	55 months	12 months	12 at 0% 37 at 18% 49 months
Interest Paid	$3,549	$0	$2,147
Total Paid	$13,549	$10,000	$12,147

The second option, although the least expensive, was a no brainer.  He couldn’t make the payments.  He will be out of debt 6 months sooner and $1,402 richer if he transfers his balance to the 0 percent credit card.  However, this only works if he doesn’t start using the credit card again, makes $250 payments every month, and is able to keep the interest rate at 18% after the initial zero-interest period.  Being late or missing a payment could cause the interest rate to skyrocket.

Finally, is it always best to transfer credit card balances to zero-interest cards?  Nope.  Every case is unique.  Run the numbers before you make a decision.  Again, http://www.creditcards.com/calculators/ is an easy-to-use tool to help you analyze a credit card offer.