9 diagrams of the balance transfer credit card

Clear-cut explanations on how it can help manage debt.

These diagrams go out to the visual learners out there. The ones in debt and want to know why it’s so hard to pay off your credit cards. We show you how much you’re throwing away in interest fees and how a balance transfer credit card can reduce these costs to get out of debt faster. Ultimately, it’s the cost of doing nothing.

THE SETUP

In the following 9 diagrams, we’ll use an example scenario to make this a bit more concrete:

Imagine you have a credit card with:
  • $5000 balance
  • Interest rate APR 17.99%
  • No annual fee

And you’ve been making monthly payments of $100 (about the minimum payment needed to not gain late fees).

You get an offer for a new balance transfer credit card with the following rates:
  • Introductory 0% APR on balance transfers for 12 months
  • 3% Balance transfer fee
  • No annual fee

1. First of all, what is a balance transfer credit card and how does it work?

Simply, it’s a regular credit card except banks allow you to transfer the debt you have on other credit cards to this card. You are rewarded with a much lower interest rate offered for an introductory period. Ideally, this rate is 0% APR. And despite the balance transfer fee that may be included (albeit some waive this fee as well), you could save hundreds or thousands of dollars from avoiding those double digit APRs found on most credit cards. In our first diagram, we demonstrate how this works, what would happen if you made the same $100 payments in our example scenario and what else you could be doing with the money saved.

What is a balance transfer

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2. The cost of doing nothing: $4302 over 7 years and 2 months

$741.69 is just how much you’ll save in the first year. If you don’t balance transfer, and only pay $100 month, it’ll take you 7 years and 2 months to pay off the credit card and you will have accrued $4302 in interest! Compare this to how much you’d spend if you balance transfer it to the new card, and you’ll see $2,076 in savings and finish paying your card 21 months earlier!!

This is assuming the APR you receive after the 12 month introductory rate is equal to the original APR and continue to make your $100 monthly payment.

Cost of not making a payment on a credit card

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3. Another way to think about the cost of doing nothing:
73% of $100 payment goes towards interest fees

It can be mind boggling how much you pay in interest over years. But once you look at how much of your payment goes towards interest fees each month, the math becomes clear. In an example like this, fees end up taking up 73 percent of your payment! Meaning only the remaining 27 percent is going towards paying off your balance.

For this reason, only making the minimum payment is not a good idea. Every purchase you’ve made on your credit card is now multi-fold more expensive and explains why getting out of credit card debt can feel like quick sand.

Impact of $100 payment on interest

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4. How does the bank make money off of a balance transfer credit card?

The balance transfer credit card company is hoping that you don’t pay off your balance in the intro period. That way, the new credit card will get your high interest payments after the intro period. It’s like when a cell phone company offers to buyout your contract from a competitor so that you can start paying them your monthly phone bill.

In the case that you only make $100 payments each month, you’ll still spend $2,076 in interest after the introductory rate is over (plus $150 in balance transfer fee). This comes to a total of $2,226. That’s definitely a good enough reason for a bank to want to offer you 0% APR for the first 12 months.

Bank fees on balance transfer cards

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5. When you should get a second balance transfer

Understanding how much you’ll still spend on interest payments after the intro period, will lead you to consider a second balance transfer if you can’t pay off your debt within the intro period. You won’t be able to do this with the same bank, but another bank may be interested in your business. In this diagram, we compare the time and money you’ll waste doing nothing, doing one balance transfer, doing two balance transfers with the same terms, and paying off your balance within the first balance transfer intro period.

Time and money wasted when not performing a balance transfer

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6. The best way to use your balance transfer credit card

Still, to take full advantage of a balance transfer credit card is to pay off the entire balance within the introductory period. In this case, if you can swing $429.17 a month during the first 12 months, you’ll pocket $4152 that would have gone towards paying interest on your old card. That sort of cash is worth making a budget over and re-examining where you can cut costs to pay off your balance within the intro period. We’ve given you some ideas on the other things you could spend your money on rather than interest fees to the bank.

Best uses for a balance transfer card

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7. When shouldn’t you do a balance transfer?

Compare the fees of doing the balance transfer with your interest payments. If you can pay off your debt before the interest fees exceed the balance transfer fee, then crush that balance with the necessary payments.

In our example, we recognize the $150 balance transfer fee is still no chump change. It’s about 2 months in interest payments. So if you can afford to pay your debt in 2 months, it’s not worth doing a balance transfer. Plus, you’ll massively improve your credit score the next time the credit bureau updates your information.

When not to do a balance transfer

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8. Poor credit is the biggest reason to not do a balance transfer

If you know you won’t be able to pay off the credit card within the intro period, you could end up with an APR that is higher than the interest rate. And you will also have more difficulty qualifying for a second balance transfer credit. As a result, doing nothing might be the better than applying for a balance transfer credit card.

Not sure if you have poor credit? Read our finder.com guide to understanding your credit and find out how you can improve it. You may want to look into consolidating your debt with a personal loan instead.

Avoid balance transfers if you have poor credit

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9. Payment hierarchy: Another balance transfer thing to watch out for

Clearly, the best thing to do with a balance transfer credit card is pay off your balance. But that 0% APR can tempt you into using the credit card for new purchases. Not only are you risking not being able to pay off your credit card before the intro period, but the 0% APR may not actually apply to new purchases, and it certainly won’t apply to cash advances.

If you make a purchase on your balance transfer credit card and it has a purchase interest rate more than 0% APR, each of your monthly payments will go towards the balance with the lowest interest rate. This means until you pay off the balance on the amount you transferred, you’ll still have to pay the purchase interest rate.

Watch out for payment hierarchy

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