Isn't 0% balance transfer really 3.3% balance transfer?

[SouthJamaica]

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@Brian_Earl_Spilner wrote:

It's less than my average APR of 23% so it's still a win for me.

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Of course you're right. 3.3% is a lot better than 23%. But it's not 0%.

[SouthJamaica]

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@Anonymous wrote:

There are 0 percent transfer fee 0 percent offers as well.  Got that from NFCU.  Amex Everyday card has 0 percent transfer fees and 0 percent interest for 15 months.  Also comes with 10,000 Amex MR points.  Bank Americard offers 15 months 0 interest with 0 transfer fees.

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Absolutely. Which is why I have credit union platinum cards which have no balance transfer fee.

[SouthJamaica]

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@Anonymous wrote:

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@SouthJamaica wrote:

If you get a $10k balance transfer with 0% interest for a year, but pay a 3% balance transfer fee,

by my calculations you're really paying 3.3%, not 0%, interest.

Here's how I figure it:

1. You transfer 10k but immediately pay 300, so you're really only getting 9700.

2. You make the minimum payments of 100 mo. for a year, so your average balance is actually 9100.

3. $300 is 3.3% of  $9100.

Am I wrong?

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You are right. But it is only an approximation:

1. The minimum payment is usually a percentage of the outstanding balance (in your example 1%) and will go slightly down each month.
2. Interest is usually compounded monthly so basing the interest rate on the average balance will be slightly off.
3. Many balance transfer offers let you add the fee to the balance, and so the fee does not need to be paid upfront.

So out of curiosity I used a spread sheet to get a better estimate:

1. If the fee needs to be paid upfront, the interest rate is 3.22%.
2. If the fee can be added to the balance, the interest rate is 3.13%.

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Yes I know, I was just trying to get a broad brush picture, because I do see so many posts in this forum where people are going for 0% interest rate balance transfer offers without taking into account the balance transfer fee.

[Anonymous]

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@SouthJamaica wrote:

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@Anonymous wrote:
The $300 balance transfer fee is in addition to the $10k it doesn't come out of the 10k, basically that's like paying for a fee with some debt, so trying cancel out a negative with another negative. You're basically paying 3% interest cuz of the fee, so it's $10,300 not $9,700

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If someone lends you 10,000 in exchange for an immediate payment of 300, they've lent you 9700, not 10,000

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SJ, $300 is a fee separate from principal, you still owe 10k after making the payment.

[Anonymous]

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@Anonymous wrote:

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@SouthJamaica wrote:

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@Anonymous wrote:
The $300 balance transfer fee is in addition to the $10k it doesn't come out of the 10k, basically that's like paying for a fee with some debt, so trying cancel out a negative with another negative. You're basically paying 3% interest cuz of the fee, so it's $10,300 not $9,700

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If someone lends you 10,000 in exchange for an immediate payment of 300, they've lent you 9700, not 10,000

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SJ, $300 is a fee separate from principal, you still owe 10k after making the payment.

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SJ never claimed one no longer owes 10k.  SJ only subtracted $300 to estimate the effective interest rate. And that is definitely the correct way to do  the calculation:

On the first day the following happens: $10000 are paid out, a $300 fee is charged, and a $300 payment is made. So the balance at the end of the first day is $10000.

For all practical purposes this is the same as: $9700 are paid out, a $300 fee is charged and no payment is made.

The latter scenario makes computing the effective interest rate easier.

[Anonymous]

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@SouthJamaica wrote:

If you get a $10k balance transfer with 0% interest for a year, but pay a 3% balance transfer fee,

by my calculations you're really paying 3.3%, not 0%, interest.

Here's how I figure it:

1. You transfer 10k but immediately pay 300, so you're really only getting 9700.

2. You make the minimum payments of 100 mo. for a year, so your average balance is actually 9100.

3. $300 is 3.3% of  $9100.

Am I wrong?

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Yes, you're wrong. When you BT you get $10k with a balance of $10,300, not $9,700. If you're trying to say that you immediately pay $300 to cover the charge, then 12 months of $100 payments following your $300 payment will put you at an $8,800 balance. They want the math to be simple for users which is why they only ask what you need to transfer and then add the fee on top of that amount. Besides, you're paying the fee based on the amount you request, not the amount you owe after 12 months of payments. Think of it this way, if you make 1 payment of $10,300 immediately following the transfer or $858.34 for 12 months, you'll never pay more than the $300 fee that you paid for the $10k.

[Anonymous]

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@SouthJamaica wrote:

Yes I know, I was just trying to get a broad brush picture...

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Maybe, for the broad brush picture, calling it a 3% loan might have been better. Your calculation seemed to have led to various post (including all of mine) which only distract from your main point. But I actually like your calculation. Whenever I need to estimate an interest rate, I use the same kind of calculations.

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@SouthJamaica wrote:

... because I do see so many posts in this forum where people are going for 0% interest rate balance transfer offers without taking into account the balance transfer fee.

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I couldn't agree more. It drives me nuts when people talk about balance transfer offer, but do not mention the balance transfer fee

[SouthJamaica]

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@Anonymous wrote:

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@SouthJamaica wrote:

If you get a $10k balance transfer with 0% interest for a year, but pay a 3% balance transfer fee,

by my calculations you're really paying 3.3%, not 0%, interest.

Here's how I figure it:

1. You transfer 10k but immediately pay 300, so you're really only getting 9700.

2. You make the minimum payments of 100 mo. for a year, so your average balance is actually 9100.

3. $300 is 3.3% of  $9100.

Am I wrong?

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Yes, you're wrong. When you BT you get $10k with a balance of $10,300, not $9,700. If you're trying to say that you immediately pay $300 to cover the charge, then 12 months of $100 payments following your $300 payment will put you at an $8,800 balance. They want the math to be simple for users which is why they only ask what you need to transfer and then add the fee on top of that amount. Besides, you're paying the fee based on the amount you request, not the amount you owe after 12 months of payments. Think of it this way, if you make 1 payment of $10,300 immediately following the transfer or $858.34 for 12 months, you'll never pay more than the $300 fee that you paid for the $10k.

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You received 10k and paid 300, which means the net you received is 9700.

[Anonymous]

For those of you  who think that  SJ's  calcutions are wrong, let me give you an example:

Suppose you need   $100,  you  do not  have  any savings,  you will get  money in 12 months to back a loan, but you do  not  have any money  for any kind of payments  before  that.  You get two offers:

A)  $110 loan, 0% interest for 12 months,  a $10 fee to be paid immediately after you receive the loan.  Loan needs to be paid in full after   12 months, but no payments due (other than the fee) before that.

B)  $100 loan, 10% annual interest, no fee.   Loan needs to be paid in full after  12 months, but no payments due before that.

In case A) you get $110. But you  immediately have to use   $10   to pay  the fee.  So  you  end up with the  $100 you need. At the end of 12 months you have to pay back $110.

In case B)  you get $100, no  immediate  payment. So you do have the $100 you need. At the end of 12 months you have to pay back $110.

So the   two loans are  for all  practical purposes  the same. Loan B) clearly has a 10% interest rate. So the effective interest rate of   Loan A)  is also 10%.    

This  rate can be computed just as SJ did:  The $10 fee needs to divided by  $100  (the $110 loan minus the $10 fee), and not by $110.

[UncleB]

I like these kind of threads, as we all need to be reminded that the fee for a BT is 'real' money.

The only nit I have is with those who mention that the fee should be subtracted from the proceeds, as if it's due and payble immediately.  This is not the case.

With loans that have an origination fee, the fee amount is subtracted from the loan proceeds, i.e. if you require a specific amount, you have to account for the fee with your request.  With a credit card BT, though, you get the entire amount you request, and the fee is added to your balance.  You may pay the fee immediately, but you're not required to do so; it becomes a part of the total balance due, not a separate payable amount.  It might make your minimum payment higher, but probably not by much (and if this is a concern then the person taking the BT has bigger issues, anyway, IMHO).

The part about how with "normal" interest calculation the daily/monthly interest would be lower and lower each month as the balance is reduced is correct, and the effective APR is slightly higher than the fee amount on a 12-month BT offer due to this.  However, I suspect for many people who take out a BT this is really inconsequential, since a BT (when used correctly) will be much cheaper than paying the 'regular' credit card interest rate anyway.  Things get really interesting with 18 month offers... back in the summer I took an offer from Capital One that had a 2% fee/0% APR for 18 months; I feel confident that I did OK. 

The example with Discover is a great reminder that it can sometimes be useful to simply take a lower APR than pay a BT fee, depending on the circumstances (Capital One has been known to have similar offers as well).  For short-term needs it's often especially important to "do the math" to figure out which would be cheaper.  For example, a couple of years ago I needed to do a debt shuffle, and a BT was only needed for a couple of weeks.  I selected a no-fee standard APR with Capital One, and my total interest ended up only being a few dollars, clearly better than paying a fee up-front.