The following is a guest post
Credit card debt can be one of the most difficult aspects of a consumer’s financial life to balance. Depending on each individual’s situation, managing this debt can be a simple matter of utilizing tools that are readily available.
In more complex debt cases, the services of a licensed financial counselor may be needed; in either case, many consumers of credit may discover that the tool of balance transferring from one credit card to another is a viable way of reducing and managing the amount of debt that they owe.
Banks offer balance transfers for several reasons. Credit companies are in fierce competition with each other for new customers, especially for customers from a rival company. Consumers can cash in on this need by taking advantage of the incentives that are offered by the company during the transfer’s specified period.
These incentives can reduce the monthly payment because of the way the monthly payment is calculated. Essentially, there is a formula that determines how much gets paid each month. It is calculated by multiplying the total balance amount owed by the annual interest rate and dividing that total number by 12, which is the total months in a calendar year.
For example, say that the total balance owed is $2,000 and the annual interest rate, or APR, for that credit card is 22%. This is a high interest rate to pay, but it is very typical of credit card companies to charge a rate this high. It is also the main reason why a balance transfer of 0% for a limited time will save quite a bit of money. To find out how much, keep reading.
Calculating Monthly Savings on Transfers
In the previous example, the $2,000 is multiplied by .22, which is also 22%, in order to give the total amount of $440. This is the total amount of interest that the customer will pay on the loan for one year. If the teaser rate was 0% for 12 months, the customer would save $440 for that year.
But what would happen if the teaser rate was only good for six months, or four months? In any case, to find the monthly payment, just add the balance and the interest and divide by twelve. $2,400 divided by 12 months is a monthly payment of $200. However, during the teaser period, the balance would be added to 0% APR and divided by 12, leaving a monthly payment of only $166.67. If the teaser period is six months, and the difference between the two payment plans is $33.33 each month, than over six months, the balance transfer will have saved $199.98. Of course, these numbers change when the balance is paid down, and this happens every month as payments are made.
One of the best balance transfer strategies that a credit card consumer can have is to practice responsible payment of their debt. This means that the money saved should be immediately recycled into paying off the balance of the credit card. That $200 saved over six months can reduce the balance owed, which will reduce the monthly payments even more. The lower that total balance, the more manageable the debt as a whole.
The best credit card term to look out for on these balance transfer offers is the fixed loan rate or fixed life of a loan rate. This is the rate that will apply to the loan once the teaser period of 0% APR runs out.
In the above example, it was 6 months. At the end of that time, a new rate will set in, hopefully lower than the original rate of 22% APR of the previous card – again, just in this example.
In order to do this successfully, customers must know what their APR is right now, and what it will be at the completion of the trial or teaser period.