How a Balance Transfer Can Save You Money
A balance transfer involves moving debt from one credit card to another, typically to take advantage of a new card's low introductory Annual Percentage Rate (APR). This promotional period, often 0% for 12 to 21 months, allows you to pay down your principal balance without accruing interest, potentially saving you hundreds or even thousands of dollars.
The Math Behind Balance Transfer Savings
The calculation for your potential savings is straightforward. This calculator helps you by:
- Calculating the Balance Transfer Fee: Most cards charge a one-time fee, typically 3% to 5% of the amount transferred.
Total Debt to Transfer = Current Debt + (Current Debt * Transfer Fee %)
- Calculating Interest Saved During the Promotional Period: It estimates the interest you would have paid on your old card and subtracts the transfer fee to show your net savings.
Total Interest on Old Card = Monthly Payment * Months - Principal
Net Savings = Interest You Would've Paid - Transfer Fee
- Determining Payoff Timeline: It calculates how many months it will take to pay off the debt with your new, interest-free payments.
Months to Pay Off = Total Debt to Transfer / Monthly Payment
Practical Examples
Example 1: Significant Savings on High-Interest Debt
Suppose you have a $5,000 credit card balance with a high 22% APR. You plan to pay $250 per month. Without a transfer, it would take you 26 months to pay it off and you'd pay $1,345 in interest.
Now, imagine you transfer this to a card with a 0% intro APR for 18 months and a 3% transfer fee ($150). With the same $250 payment, you'd pay off the new balance of $5,150 in just 21 months (20.6 to be exact). Even though you have a fee, your total interest paid is $0 during the intro period. This calculator shows you've saved approximately $1,195 ($1,345 in interest avoided minus the $150 fee).
Example 2: When a Balance Transfer Might Not Be Worth It
You have a smaller debt of $1,000 at a relatively low 12% APR. A new card offers a 0% intro APR but has a 5% transfer fee ($50). If you can pay off the $1,000 in a few months on your original card, the interest you'd pay might be less than the $50 transfer fee. This calculator helps you see that in such cases, sticking with your current card could be the better financial move.