Yes or No to a Balance Transfer

Typically in life, a circumstance can have a “pro” and a “con”. So say your circumstance is that you have overwhelming debt from higher rate credit cards and loans. What do you do? Many lenders encourage you to balance transfer this debt to them. But is this a good idea? It depends on your circumstance. Remember that we are all uniquely and wonderfully made!

The following are questions that you should consider as you discern whether or not to take advantage of a balance transfer offer.

  • How long are you going to get the “special rate”? 6 months, 12 months, 18 months? The more time you have at the special rate, the more likely you can create a plan to pay it off before the balance switches to the “Go To” rate.
  • What is a “Go To” rate? It is the Annual Percentage Rate (APR) that you will be charged after the special rate comes to a conclusion. If you have a low credit score, you are more of a risk to a lender and they could charge you a higher rate – like in the low to mid 20%s -- for being such a risky loan. Why do they do this? If they charge you a higher APR and you stop making your payments then they have recouped a portion of their cost for even giving you a loan.
  • So if the goal is to pay off the debt you balance transferred completely at the special rate, can you make the monthly payment work in your budget? There is no point in setting the expectation to pay 3 or 4 times more a month on your debt when you cannot afford it. If you cannot pay it off within the timeframe, is that “Go To” rate going to hold you back from completing the goal because it is just too high?

Here is an example of a scenario – notice the special rate, length at that rate and the minimum payment to make so it can be paid off within the timeframe.

Debt Balance Balance Transfer Fee Total Balance to Transfer to Lender Annual Percentage Rate (APR) Months at the Special Rate Minimum Payment to Pay Off Debt During Special Offer Finance Charge Total Payment
$5,000 $0 $5,000 3.99% 12 months $425.73 $179.61 $5,179.61

So what do you do? Pray about the offer. If you can be intentional to pay off the debt before your special rate changes to something higher then it may be a good move for you. But remember to “not rob Peter to pay Paul”. You don’t need to be a Peter. Just try your best to meet your needs as you spending the monthly income entrusted to you. Consider your options using this loan calculator here

 

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07/12/2016 
Author: Greta Kidd, Vice President or Marketing and Outreach at Entrust Financial Credit Union
About Greta: Greta is an advocate for helping individuals fulfill their life’s calling, especially when debt may get in the way. She is a certified Crown Financial Ministries Budget Coach and attends presentations about stewardship and money management consistently. Greta believes we need to be intentional about creating time and space in our very busy lives to study scripture. This is an opportunity to learn how to become better stewards from the best teacher of all, God, with our time, talent and money.