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I'm about to do a balance transfer that has a fee of 4%. It gives me 0% interest for 14 months. Is it just a straight calculation of 4% for the year or is there another calculation that I need to include?

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    I am putting this comment here instead of as a comment on one of the answers. Be very careful not to miss the deadline for paying off the balance transfer amount, not even by "just one day". Interest at the full cash advance interest rate will most likely be charged for the entire 14-month period if you miss the deadline for repayment and you will lose all that you have saved and more. – Dilip Sarwate Mar 13 '13 at 1:58
  • I'll check on that, but I'm not sure it's set up in the same way as a short term "0% interest" promo for a store. I'm paying a 4% fee up front so I'm guessing there's no chance they'll add it back in at the end of the term. – Moi Mar 13 '13 at 8:14
  • If you miss the deadline for repayment, you will be charged interest at the cash advance rate for the entire 14 months, possibly reduced by the amount you prepaid, possibly not, and you will be charged interest until that balance transfer amount is finally paid off. Worse yet, any purchases that you might make in the interim will also be charged interest from the time they post. Don't miss that deadline under any circumstances; pay off on-line three days ahead of schedule to avoid problems like "payments received over the weekend post on Monday" and "check was not received on time". – Dilip Sarwate Mar 13 '13 at 12:24
  • I just got off the phone with Discover and they confirmed that they do not do that. There is no retroactive adding of interest when the promotional rate expires. TO make it clear she said that even if I have a $100 balance left at the end the only thing that will happen is the $100 balance will be carried forward at the new interest rate. – Moi Mar 14 '13 at 17:35
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How much interest you effectively pay depends on when you pay off the balance transfer amount. If you pay off in a lump sum after the full 14 months, you have pre-paid 4% simple interest over a 14-month period. In effect, if you transferred a balance of $100, paying $4 as the transfer fee, you have borrowed only $96 of the $100 that was used to pay off the other credit card company. Paying $100 at the end of the 14 month period is an interest rate of 100/96 - 1 = 4.1666% for 14 months which works out to be an annual interest rate (APR) of 3.57%. If you pay off in bits and pieces over 14 months, you will have paid interest at a larger rate.

Assuming you pay your credit card bill in full each month, does paying off each month's new charges count as having paid your credit card bill in full for that month so that new charges in the month following do not get hit with interest from the time they are posted? If not, you will end up paying a lot in these interest charges too. In short, read the fine print of the balance transfer offer very very carefully.

  • According to the CARD act, payments are always applied to the oldest balance. – littleadv Mar 12 '13 at 19:54
  • @littleadv Does that mean that once the balance transfer has occurred and the OP has paid off in full the balance shown as due on the next credit card statement, all future payments will go towards reducing the balance transfer amount since that will be the oldest balance? – Dilip Sarwate Mar 12 '13 at 20:03
  • The card I'll be transferring to has a $0 balance. It's true that all payments go towards the balance transfer first so they can get some interest on new purchases, but I won't be making purchases so all payments will go towards the balance transfer. – Moi Mar 12 '13 at 20:23
  • @Dilip: "If you pay off in bits and pieces over 14 months, you will have paid a heck of a lot more." I don't follow this statement? – Moi Mar 12 '13 at 20:23
  • @Moi relatively more. The amount you pay is fixed, but as a percentage of the debt it will be higher the faster you pay the debt off. – littleadv Mar 12 '13 at 20:36
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If you keep the whole balance for the whole 14 months and pay it off right before the interest raises, you'll end up with ~3.43% APR.

If you're going to pay off the balance gradually, then the effective APR will be higher.

  • So you're taking 4%, dividing by 14 months, then multiplying it by 12 months to get a yearly rate. – Moi Mar 12 '13 at 20:20
  • @Moi, yes, assuming you don't make any payments (balloon). Otherwise its much more complicated. – littleadv Mar 12 '13 at 20:36
  • @Moi While littleadv did get 3.43% by dividing 4% by 12 and multiplying by 12 to get an APR, I don't think that that 4% is the right number to be using. If you transfer $100 paying a 4% transfer fee and then pay off $100 at the end of 14 months, you are in effect borrowing $96 and paying off $100 at the end of 14 months, and so the interest charged is effectively $4/$96 = 4.16666..% for 14 months, not 4%, and so the APR is actually about 3.57%, not 3.43%. – Dilip Sarwate Mar 12 '13 at 22:45
  • @Dilip I think that when you transfer $100 - you transfer $100, not $96. You get $104 as your balance. – littleadv Mar 12 '13 at 23:02
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    Since I'm currently at 13.99% I come out ahead anyway you slice it since I won't be paying the card off during the 3.43% interest phase. Even if I do it means my situation changed the the fee becomes a sunk cost in my mind, or almost like a type of insurance. I suppose the real interest rate depends on the situation at that particular point in time. – Moi Mar 13 '13 at 0:06

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