Credit Card balance transfer question?

A classic math question. Let's go through the steps to figure this one out.

2% of the amount borrowed comes out to $40, as you have noted.

As things go, that's a pretty good deal. But what is the "real" interest rate, meaning what rate of interest applied each and every month, like the other cards, would earn $40 by the time you've paid down the $2,000?

For the sake of comparison, we'll say it will take you a year to pay back the $2,000.00, which is to say, 12 payments of about $167.00 each.

So the question is, what annual rate of interest, applied monthly to a $2,000.00 balance, would earn $40.00. The answer is, roughly 3.5%. So, in other words, the effective rate of interest (3.5%) is about 175% more than the 2% you paid. However, that is still a lot less than the 13.24% you're paying the other cards, so its a good deal.

But wait. If we assume that the $167.00 you pay each month must be taken FROM the payments you make to the other 2 cards, it means you will have only $133.00 remaining to pay those other 2 cards. ($300 total now paid, less $167 going to the 3rd card). So, your best move is to pay off the card with the lower balance completely, and apply the remainder to the card with the higher balance.

That means you will then be paying TWO balances. One will be the $2,000 on the new card, the other will be $8,406 on the remaining card with 13.24% interest. (That is, take away the $791 balance on the lower balance card, leaving you with $1,204 to pay to the higher balance card, leaving an $8,406 balance on that card).

Now the question is, how long will it take to retire the balance on the card with the higher balance, if you pay $133 per month, and don't make any purchases? The answer is, about 6 years. But that's not the whole story. In a year, you will have paid off the low rate card, so you'll NOW have $300 available to pay against the high rate card.

Now we need to know the balance on the high rate card after 1 year of making $133.00 payments. The answer is, about $6,800.00. So the question is, how long will it take to pay off the $6,800.00 if you make $300.00 payments each month? The answer is, about 2 years and 3 months.

So, how does this compare to doing nothing? Just keep hacking away at those 2 cards? Since they carry the same rate on interest, we can add the balances together as if they were one loan. That comes out to a total balance owed of 10,460. How long, then, to pay off that amount by paying $300.00 per month? About 4 years. Over that time, you will have paid about $3,040 in interest.

So, what is the dollar amount of interest if you take the $2,000 low interest deal?

$40.00 paid once to the low interest card.

$0.00 interest on the paid off card

$1,422.00 on the high balance card

$1,462 total if we borrow the $2,000.00. Which is a much better deal that paying over $3,000.00, if you do nothing.

Do the deal, but remember, this only works if you pay what you have been paying and charge NOTHING more.

There are numerous financial calculators on the web to help you figure this out. The numbers I report are based on simple interest calculated and paid monthly - your card may vary. But, I think I have you in the "ballpark."

Hope that helps.

By the way, nice catch on the fine print thing. Indeed, while you may not be able to "sign the check over" to another card, you can certainly deposit it, and then do what you like. I pity the poor person who didn't read the fine print correctly.

If you read the fine print, you WILL find you can't use the convenience check to pay another credit card and receive the 0%.

I don't consider that's true