Wednesday, November 5, 2008

0% APR Balance Transfer Offer Not Worth It

Bank of America just sent me a 0% APR Balance Transfer offer with a transaction fee of 3%. The promotional rate applies until the closing date of October 2009 (sometime around the 26th).

In my financially carefree (read: reckless) days, I'd immediately jump on these offers in a practice I call "merry-go-card". But now that I'm trying to be a bit more rational and responsible, I calculated whether this is a good deal for me. Turns out, it's not.

I have a balance of $12,526.03 (as of October 6, 2008) on my Chase Mastercard with a 5.99% APR until it is paid off. (I know if I miss or am late on a payment, the APR will be jacked up to a usurious rate. But I'm not concerned about that since I'm now anal about paying my bills on time.)

Based upon my current debt snowball repayment plan, I am paying my Chase card $265/month until June 2009. Thereafter, I start paying $1,053/month since I'll be rolling my extinguished car payments into my credit card payments. (Of course, if I'm asked to work from home, my snowballed credit card payment will be reduced to $653/month. But since that hasn't happened yet, I'm going to proceed with the $1,053/month assumption.)

My current 1-year repayment schedule with Chase looks like this:

If I take advantage of the BofA promotional 0% balance transfer, my credit card balance will increase to $12,901.81 due to the 3% transfer fee. My 1-year repayment schedule with BofA would look like this:

It seems like I would ultimately come out ahead by about $250 by taking the BofA deal. But due to the transfer fee, I won't break even until May '09. And since the promotional rate ends in October '09, I'll probably have to do another balance transfer again. Assuming another transfer fee of 3% on the $6,570 balance, my $250 "savings" will be reduced to $52.90. Hardly worth the effort.

And, who knows where interest rates will be in a year? Seeing that the US is currently suffering the same economic malaise as Japan in the '90s, I've given myself over a 60% chance that interest rates will continue to remain low and that I'll find another 0% offer in 2009. On the other hand, since the US is printing money like crazy to fund the bailout, we could have a potential '70's-style stagflation. As I said before, I can't really read economic tea-leaves (and apparently neither can "experts" like Alan Greenspan and Ben Bernanke.)

The bottomline is, this balance transfer offer only makes sense if I can pay off the balance before the promotional rate expires because the transfer fee eats up most of my savings.

I called Chase to see whether it would be willing to reduce my current interest rate based upon the 0% offer that I received from BofA. No dice. The 5.99% life-of-loan APR is a promotional deal that they won't be willing to re-negotiate.

Yet another bitter life-lesson pill for me to swallow.


Anonymous said...

There is a lot to be said for the learning process. Doesn't it make you feel great to know that you weren't sucked in by what looked like a good deal? Good for you. Eventually, once we learn all these life lessons we will be financially savvy and never get ourselves in this mess again.

Anonymous said...

I have 2 credit cards with 6% interest. I stopped bouncing the money around. I didn't want to deal with time lines. Good for you. Nice job.

Sharon Rose said...

Hi there-Ultimately, you have the better deal already on the table
(5.99% for life), but you were so right to do the maths first. You've got peace of mind too, as like you say, who knows what rates will be like in a years time? well done.

MoneyMateKate said...

Shtinky, isn't there a maximum balance transfer fee? They're usually capped between $50 and $100. In which case, that improves your savings by another $150-200.

jpkittie said...

good for you for checking out the savings before just jumping ship --- I am horrible about that stuff also --- I would have ended up jumping instead of even seeing if it would be a better option! good job!!!

Shtinkykat said...

debtfree2009: Thanks. I'm a slow learner but atleast I learned!

MOU: 6% is a great rate. Bouncing it around just creates more problems.

Sharon Rose: Thanks!

MMK: There used to be caps. But there aren't that many credit card companies that have the maximum cap now. Discover used to have a cap but it's rumored that they're getting rid of the max cap too. Sigh.

jpkittie: Thanks!

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