By Roman Shteyn
NEW YORK (TheStreet) — You might find yourself racking up a bit of credit card debt as you go into swipe mode to beat the holiday countdown clock. Sales can be hard to resist. Those sale prices aren’t so attractive, though, if you have to pay double-digit interest rates on outstanding card balances.
You might be considering a balance transfer. We’ve all seen the offers — every time you go through the pile of mail, there’s a new one. You may have been hesitant because it seemed like a hassle, or maybe just because it sounded too good to be true. But you won’t know until you try.
Walk through these steps to decide if a balance transfer makes sense for you.
1. Know the terms. How long is the introductory period? What is the fee? What happens at the end of the period? Balance transfers sound like a no-brainer, but keep in mind they do come with limitations and a price. Some zero-interest offers can be six months, while others go up to 18 months — obviously, the longer, the better. And you can expect to be charged an upfront fee for the transfer, usually around 3% of your balance. So a $10,000 balance with a 3% fee would tack on an additional $300 to your balance. If your current card has a 13.99% APR, transferring would save $775 in interest for the year, so you’d come out on top.
2. Think through your situation. Are you struggling to pay more than the minimum payment? If so, it’s likely most of your payment is going toward the interest charges and not much of the principle balance. That’s why it seems like your balance hardly ever goes down. Having a zero interest rate for a time can help you pay down that debt.
3. Assess whether you can actually pay off the balance before the zero rate expires. It makes the best sense to transfer your balance if you can pay it off before the introductory period is over. That’s because once the interest starts tacking on again (and don’t forget to find out what it will be), you could potentially fall back into the minimum-payment trap. Something else to consider: If the balance offer is with a new creditor – meaning you’re opening an account — keep in mind your credit score could take a temporary hit for opening an additional line of credit. That could matter if you plan to apply for a loan or mortgage in the next few months.
4. Decide if you should go for it. You can crunch the numbers yourself the old-fashioned way, or you can plug them into this balance transfer calculator. You’ll be able to see how much you’ll save and how much your monthly payments will have to be to pay off the balance in time to avoid the higher rate.
As those transfer offers come rolling in, avoid moving your money around haphazardly with no goal or game plan. Ultimately, a balance transfer can work out in your favor, but only if you think it through. Don’t take a hefty balance with you into the new year.
Roman Shteyn is co-founder of Credit-Land.com. He writes frequently on personal finance and credit-related topics.