The smart way to use credit card balance transfers
By Greg McBride, CFA • Bankrate.com

The landscape of low interest rates, with attractive solicitations sprouting up everywhere, has been fertile ground for continued strength in consumer spending. However, low interest rates also represent an opportunity to accelerate repayment of the costliest debt most consumers have -- credit cards.

Sure, many have consolidated their accumulated credit card balances on a home equity loan or as part of a cash-out mortgage refinancing, taking full advantage of the heady appreciation in real estate prices and the swelling equity stake homeowners have at their disposal. While this represents a positive step for those disciplined enough to refrain from subsequently re-accumulating high interest rate debt, it isn't necessarily appropriate or viable for everyone. Fortunately there are plenty of attractive offers on credit cards that borrowers can use to step up their debt repayment efforts.

Consider the example of someone with $5,000 in credit card debt at the national average standard variable rate, which today stands at 13.81 percent. The cardholder receives a solicitation for a six-month introductory rate of 2.9 percent that applies to both balance transfers and subsequent purchases. The cardholder will also incur a balance transfer fee that is capped at $50. Let's assume the rate jumps to 13.81 percent at the end of that six-month introductory period.

For a cardholder intent on repaying debt, paying $200 monthly and not using the card for additional purchases, it would take a total of 30 months and $930 in interest charges to pay off such a balance at 13.81 percent. But by transferring to a lower rate card and refraining from additional purchases, the savings pile up as the balance declines. The interest charges paid during that six-month period and the balance transfer fee of $50 still results in savings of more than $200 during that time. In addition, by retiring more of the principal balance during that six months thanks to the lower interest rate, the repayment period and total interest paid afterward also decline. It will take an additional 22 months and $531 in interest to then pay off the balance once the rate jumps to 13.81 percent, paying off two months earlier and saving an additional $78 in interest. The total interest savings over the entire repayment period is $282, even after forking over an additional $50 for the balance transfer fee.

Rather than seeing the interest rate jump at the end of the six-month introductory period, the cardholder could always jump to another low rate offer to perpetuate the accelerated debt repayment.

Consider the alternative, in which the cardholder jumps at the low introductory rate offer, but not at the opportunity to methodically pay down the debt. What happens if the cardholder treads water for that six-month period, using the low rate as an excuse to make additional purchases that counter any principal being paid down, and only gets serious about debt repayment once the introductory period ends? With the opportunity now squandered, it will still take another 30 months and $930 in total interest to payoff the balance once the rate jumps to 13.81 percent. Adding this to the interest charges of $72.50 paid during the introductory period and the balance transfer fee of $50, the total interest cost becomes $1,052.

What's more, many attractive balance transfer rates apply only to the balance transferred and not to subsequent purchases or cash advances, which accrue at a higher rate. Any payments are applied to the lowest rate balance, with a higher rate balance not being paid down until anything at a lower rate has first been paid off entirely.

Low interest rates can be a strong tailwind on the journey to debt repayment. Consumers eager to take the most efficient route to becoming debt-free can use a new debt paydown calculator from Bankrate.com. The calculator will provide a month-by-month payment plan for up to six years, showing borrowers how to maximize their efforts to payoff debt. Any debt repayment effort undertaken now while interest rates are low, will yield quicker results than when interest rates begin to rise.

Greg McBride is a senior financial analyst for Bankrate.com.

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