Are Balance Transfers Still a Good Deal?

Kiplinger's has often recommended that people with credit-card debt take advantage of low-rate balance-transfer offers. Why pay 10%, 12% or 20% interest when you can pay 0%, right? Because it was easy to be approved for these offers, some people would transfer balances to a new card every time their low-rate introductory period ended -- and avoid paying any interest on their credit-card debt.

These offers looked like they were going to become even better deals once the new credit-card rules kicked in February 22, 2010, and required card companies to apply any payment made above the minimum to the highest-rate balance first. But card companies have been hiking balance-transfer fees to increase revenues before the new rules take effect. Chase and Discover, for example, now charge a 5% balance transfer fee, says Bill Hardekopf, chief executive of LowCards.com and author of The Credit Card Guidebook.

So before you transfer a balance from one card to another, you should do the math to see if the amount of interest payments that yousave with the introductory offer outweighs the balance-transfer fee that has to be paid immediately, Hardekopf says.

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For example, say you have a $3,000 balance on your current card with 20% rate. You would have to pay $300 a month wipe out that debt in 12 months and you'd pay $309 in interest. You actually would pay half that amount if you took advantage of a balance-transfer offer with a 0% rate for 12 months and a 5% fee. If you paid off your balance in 12 months, you'd pay no interest -- just the $150 fee.

However, if your card had a rate of 8%, you would fork over only $125 in interest if you paid $275 each month to wipe out your balance in a year. So you would pay more just to transfer your $3,000 balance to that card with a 5% fee. Use our calculator to see how much interest you'd pay at your current rate to see whether it's worth it to pay the balance-transfer fee to switch to a low-rate card.

Hardekopf says that if you have a credit score of 740 or higher and your card's rate is more than 15%, you should consider transferring your balance to a card with a lower rate. If your credit score is low, you probably won't get the advertised low rate, your introductory period may be just three to six months, and you may not be able to transfer your entire balance. Plus, your credit score could drop even more if you apply for more cards.