Good morning! Let’s check out a reader question from Mimi:
I got about $4000 in credit card that I paying off about 3 hundred every month. It should take about 15 month right? I got checks in the mail from another credit card that say I pay 1% interest for a year. I think my card now is 16. Is this a scam? If it real should I do it?
Hi Mimi- Thank you for your email.
Without seeing them myself I can’t judge whether they’re real — and if you’re concerned, contact your credit card company directly — but what you’re describing is a real thing called a balance transfer.
A balance transfer is exactly what it sounds like; you use the checks (or fill out a form online) to pay off your high-rate balances, which transfers your balance to the new company. While you’re paying off the credit card, you pay a lot less interest so it can be a good way to save money.
Check out the fine print, though. These generally come with a balance transfer fee of 5% of the total balance you transfer. For you, that would be $200.
If you kept paying away at your 16%, this is what your payoff would look like:
If you paid a $200 balance transfer fee to get that 1%, here’s what your payoff would look like:
Since you’re not paying off as much interest along the way, your total payments are $120 less. That’s a good amount of money for not having to do anything!
Wait, so what’s the catch?
There are a few catches.
The balance transfer fee adds a little to your starting balance. The lower interest rate makes it worth it over the long run, but if you can find an offer without a fee, you’ll be better off. I believe the Slate card from Chase still has no balance transfer fee for new sign-ups.
Besides that fee, the other important number to look for on the offer is the penalty rate or the rate the credit card will reset to after the one-year 1% teaser rate expires. This should tell you how important it is that you stay responsible and keep to your plan to pay off this debt.
The most important thing is to be self-aware. I don’t know you personally, but many people with credit card debt got there because they like buying things. The most dangerous thing that a low-interest rate balance transfer can do is convince you that you should keep buying stuff because you’re not going to be paying much interest on it. And if that happens, you may find yourself stuck at the same point one year from now.
Remember that debt-free is the place you want to be. Think of this balance transfer offer as a cheaper way of getting there.
Also, in the meantime, maybe you should ask your credit card company if they can lower your rate.
Hope that helps and feel free to get in touch if you have more questions.
And to everyone, have a great weekend 🙂