Credit Card Shuffling – The Investing Site’s top tips for making balance transfers work for you.

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Credit Card Shuffling

So many credit card offers come through my door each week that I’m being overwhelmed by them all, but the question is are they worth while in using their balance transfer offers or is it just a sneaky scam?

Obviously most of the offers you get are just ‘teaser’ rates which expire after a short duration, but is there maybe a way to use this to our advantage? There just may be.

Before we continue, you should be very cautious about transferring to a new card as many offers have hidden fees of around £25 when you transfer a balance to the card.

So, how do you decide if it’s a good idea to transfer your balance over? There are lots of different rates and it can become confusing but let’s see if we can break down the ‘magic’ behind the card myths.

We’ll start with interest rates and interest payments. Most people are confused by this and don’t understand that there is a difference. The interest rate is the way in which your borrowing is measured. The interest rate is how quickly your debt adds up. With most companies the rate is shown as a percentage based on borrowing the money over a 12 month period. The interest payment is the amount of money you are paying in interest with each payment you make. This isn’t show as a percentage, but in fact shown as a monetary figure. To see both of these in practice just have a quick flick through a magazine like the exchange & mart and read some of the financial company’s adverts. These figures are always stated in tiny writing at the bottom. Now we understand the difference we can move on to determining if you will save money.

We can use a very simplified formula for figuring this out. You will need a calculator and something to write with and on. Let’s find out how much interest you’re likely to pay. Multiply the amount of money you wish to borrow (or transfer) by the interest rate of the card. Then take that figure and multiply it by the amount of time you have owed that money.

E.g. If you owe £600 and the interest rate is 14% with an estimate of a seven month loan period, you will need to do the following;

600 (monetary amount) x .14 (14%) and then multiply this answer (84) by 7/12 (7 months out of 12 months which equals 0.6) and you will get;

600 x .14 x 0.6 = £50.40

Let’s break that down in smaller steps to fully understand it. Firstly we used 600x.14 which is the same as saying that if you borrowed £600 for 12 months you would be charged 14% or £84 (600 x 0.14). But in our example you are only borrowing the money for seven of the twelve months so we need to put 7 months into a decimal figure. We do this by taking the amount of months we are borrowing and divide them by 12 (months in a year). So 7/12 = .6. So we then took our previous answer (£84) and divided by our new answer (.6) to give £84 / 0.6=£50.40 in interest charges.

Let’s quickly do another to show you a slightly different method. This time we’ll borrow £1000 over 2 years and 14 days. This looks more complicated but if you break it down into 2 parts we can do it easily. Firstly the amount and interest rates are still worked out the same way, £1000 x 14 (1000 x 0.14) = £140 (140). Now we must work out the time. To do this we use a similar method. Firstly take the number of days, in this case 14. We then use the calculation 14/365 (days for loan divided by days in a year) which gives us .04. Add this figure to the amount of years (in our case 2) and you have 2.04. Now if you remember our interest was £140 for one year, so for 2.04 years would be £285.60.

OK onto the card balances. Say you have a current card with a 15% card and want to transfer your balance to a 7% card – and who wouldn’t? We’ll take an average figure of £500 to transfer, you may have more or less but follow the formula above and you can work out your figures exactly.

So you owe £500 and want to move to a lower rate card. So in this instance we need to find out how much you’ll save by moving your balance over. To do this we simply subtract the new rate of 7% from the old rate of 15%, which in our example leaves us with 8%. So you will save 8% on your balance over the period of twelve months.

In practice, in our example, you would save 8% on £500 over one year, so you’d save £40 (500 x 0.08). Now if you had to pay a transfer fee of £25 you would only actually save £15.00.

If your original card interest rate was lower, say 12%, then after figuring out the interest difference and working it out the saving would actually cancel out the fee and you would save no money.

There is unfortunately no rule of thumb answer, but once you have the formula and understand the working behind it you can work out any balance transfer, interest rate, loan amount, mortgage etc… taking the power away from the lending agencies and placing it firmly in your hands.

Next time you get a supposedly tasty offer through the post, check it out first – it may be a wolf in sheep’s clothing.


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