Real World Situation: 0% credit card transfer offer

[tags]General,,[/tags]

A few months ago a young married couple came to see me and engaged my services. Like many young couples, they are interested in creating a solid financial foundation on which they can build their lives. They are excited about the future.

Often, we feel as if financial problems are unique to us individually. We think that the world around us only knows financial peace and harmony, while we deal with budgeting, saving, and concerns about our investments. As a Certified Financial Planner ^TM I know just how common these feelings are, but confidentiality prohibits me from sharing. This particular couple wants to share so that others can learn from their experience. So with their permission, this is part of their situation.

They have a bit of credit card debt which not only carries a pretty high interest rate, but the monthly payments are a burden on their budget. I offered that a short term goal should be to eliminate the credit card debt as soon as possible. I also mentioned that I thought their interest rate was high and suggested that they call the credit card company and ask (insist?) that they lower their rate. After doing that, the wife asked me this question:

"I finally got my credit card company called and they lowered the interest rate to 10.9% from 14.9%. We have budgeted to have this debt paid off by year end, but is it worth transferring the balance to another card? One company is offering us a free transfer with a 0% rate for the first 12 months and another offers 5.99% fixed for balance transfers. It will be paid off soon anyway, but we could save $50 a month. What do you think?"

To begin with, they saved 4% on their interest rate just for asking! It never hurts to ask.

Before doing any balance transfers, I advised them to pay extra attention to the fine print. Balance transfers between credit cards often involve a 3% fee. That fee is upfront and on the entire balance transferred. If we assume that the balance decreases lineally over a year that would have the same effect as 6% interest charged monthly. The fee alone often makes a balance transfer unrealistic.

If the first company is offering no transfer fees and 0% for 12 months, that becomes a no brainer. Then they could choose to either budget less to the card and still have it paid off by the end of the year, or pay the amount they have already budgeted and be done with it sooner.