How to Calculate if a Balance Transfer is Worth It
In New Zealand, managing credit card debt can be challenging, especially when faced with high interest rates. A balance transfer can be a strategic tool to alleviate this burden by moving your debt to a card with a lower interest rate. However, determining whether a balance transfer is worth it requires careful calculation and consideration of various factors. This article will guide you through the process of evaluating a balance transfer, ensuring you make an informed decision.
Understanding Balance Transfers
A balance transfer involves moving your existing credit card debt to a new card that offers a lower interest rate, often as low as 0% for a promotional period. This can help you save on interest costs and pay down your debt more quickly. In New Zealand, many banks offer balance transfer deals, but terms and conditions vary, so it’s important to understand the specifics of each offer.
Key Considerations for a Balance Transfer
- Interest Rates and Promotional Periods The primary advantage of a balance transfer is the reduced interest rate. Many New Zealand banks offer 0% interest for an introductory period, typically ranging from six months to two years. It’s crucial to know the duration of this period and the interest rate that will apply once it ends. For example, ANZ offers a 1.99% rate for 24 months, after which the rate increases to 13.90%.
- Balance Transfer Fees Some cards charge a balance transfer fee, usually a percentage of the amount transferred. This fee can impact the overall savings from the transfer. For instance, a 1.99% transfer fee on a $10,000 balance would cost $199, reducing the potential savings.
- Annual Fees Consider any annual fees associated with the new card. While some cards may waive the fee for the first year, others may charge an ongoing fee that could offset the benefits of the lower interest rate.
- Repayment Strategy A balance transfer is most effective when you have a clear plan to pay off the debt within the promotional period. Failing to do so can result in high interest charges once the introductory rate expires.
- Eligibility and Restrictions Ensure you meet the eligibility criteria for the balance transfer offer. Most banks require you to transfer debt from a non-affiliated card, meaning you cannot transfer balances between cards from the same bank.
Calculating the Worth of a Balance Transfer
To determine if a balance transfer is worth it, follow these steps:
- Calculate Current Interest Costs Determine the interest you are currently paying on your credit card debt. Most credit card interest rates in New Zealand hover around 20% per annum. Use this rate to calculate your current monthly interest cost. Example: For a $10,000 debt at 20% interest, the monthly interest cost is approximately $167.
- Estimate Savings with Balance Transfer Calculate the interest you would pay with the balance transfer rate during the promotional period. Subtract any balance transfer fees from the savings. Example: With a 0% interest rate for 12 months and a 1.99% transfer fee, the savings would be $2,004 minus the $199 fee, resulting in $1,805 saved.
- Consider Post-Promotional Interest If you cannot pay off the balance within the promotional period, calculate the interest cost at the standard rate for the remaining balance. Compare this to your current interest costs to assess overall savings.
- Factor in Fees Add any annual fees or additional charges to the total cost of the balance transfer. Ensure the savings outweigh these costs.
- Evaluate Total Savings Compare the total cost of maintaining your current credit card debt with the cost of the balance transfer, including all fees and post-promotional interest. If the balance transfer results in significant savings, it may be worth pursuing.
Practical Example
Suppose you have a $10,000 credit card debt with a 20% interest rate. You are considering transferring this balance to a card offering 0% interest for 12 months with a 1.99% transfer fee and no annual fee for the first year.
- Current Interest Cost: $167 per month, $2,004 annually.
- Transfer Fee: $199.
- Interest Savings: $2,004 (current interest) – $199 (transfer fee) = $1,805 saved in the first year.
If you can pay off the debt within the 12-month period, the balance transfer is clearly beneficial. However, if you anticipate a remaining balance, calculate the interest cost at the post-promotional rate and reassess the savings.
A balance transfer can be a valuable tool for managing credit card debt, but it’s essential to conduct a thorough analysis to ensure it’s worth it. By considering interest rates, fees, and your repayment strategy, you can make an informed decision that aligns with your financial goals. In New Zealand, where credit card interest rates are typically high, a well-executed balance transfer can lead to significant savings and faster debt repayment. Always read the terms and conditions carefully and consult with a financial adviser if needed to ensure the best outcome for your financial situation.