Can You Afford a Balance Transfer?

One of the main reasons for taking a balance transfer is to make it easier to pay off a high interest rate credit card balance. By transferring your high interest rate balance to a credit card with a 0% balance transfer rate, you eliminate finance charges for at least a few months and more of your payment can go toward reducing the credit card balance.

It's too bad 0% balance transfer rates don’t last forever. By Federal law, a promotional rate has to last at least six months, but fortunately, some credit card issuers offer great balance transfer rates for 18 and 24 months. (You typically need a great credit rating to apply for the best balance transfer deals.)

While you may not pay interest on a balance transfer with a promotional rate, the transaction isn't completely free. You’ll have to pay a balance transfer fee between 2 and 4% of the balance you transfer. The fee is automatically added onto your balance when you make the transaction.

To fully take advantage of a balance transfer, it’s best to completely pay off the balance before the promotional rate expires. Otherwise, any remaining balance will accrue interest at the higher post-promotional rate. Once again, your monthly payments will be split between interest and the actual credit card balance.

Before you transfer a balance, it’s a good idea to calculate the monthly payment you’ll have to make to pay off the balance before the promotional rate expires. First, figure out your balance after the balance transfer fee is added. Multiply the balance you’re transferring by 1 plus the transfer fee percentage. For example, if the balance transfer fee is 4%, multiply by 1.04. An $8,000 balance with a 4% balance transfer fee would be $8,320. Then, divide that number by the length of the promotional period to get your monthly payment, e.g. $8,320 divided by 18 would be $462.22.

If your promotional balance transfer rate is higher than 0%, you can use an online credit card payment calculator to figure out the payment necessary to pay off your balance before the promotional rate ends. It’s harder to do this math by hand since you have to figure in finance charges.

Once you’ve done that math, the question you need to ask yourself is “Can I afford to pay that much each month?” Review your monthly budget to see if you have enough monthly left over to make the payment. Perhaps you can make minimum payments on your other credit card debts while you eliminate this balance.

If you can’t afford to pay the maximum on your balance transfer, pay as much as you can. That way, you eliminate a big portion of the balance and you’ll have a smaller balance to deal with once the post promotional rate kicks in.

You shouldn't settle for the minimum payment on your balance transfer, unless your budget is extremely tight and you absolutely cannot afford to pay more than that. The 0% interest rate will give you some temporary breathing room, but it will be important to try to decrease your expenses or increase your income before the rate expires.

Finally, don't make your balance transfer more expensive by making purchases on the card. Keep this card free from other types of transactions until the balance transfer is completely repaid.