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What’s a credit card balance transfer? Can it save you money?

If you’ve been chipping away at a credit card balance but feel like you’re not really making a dent, you may want to consider a new strategy: making a credit card balance transfer. In this article, we’ll walk you through the basics of credit card interest and how to use a credit card balance transfer to keep your debt load under control.

How credit card interest is calculated

When you use a credit card, there’s an APR, or annual percentage rate, that’s applied to purchases or other services like cash advances. With many cards, this rate hovers at around 19.99%. As the name suggests, this is an annual percentage rate, but credit cards are charged monthly—so you’ll need to do some math if you want to know your daily or monthly rate. The formula is simple:

APR divided by 365 (the number of days in a year) = daily interest rate

To determine the monthly rate, multiply the daily interest rate by the number of days in the month.

How compound interest increases debt

Now that you understand how APR works, it’s time to look at compound interest. Credit cards calculate what you owe based on the principal (what you’ve charged to the card) plus any interest accumulated.

Let’s say you have a balance of $1,000 at 19.99% APR. This works out to a monthly interest rate of $16.50, so after the first month, your balance would be $1,016.50. Take a look at the following table to see how compound interest would affect your balance if you didn’t pay anything towards your bill for six months.

$1,000 debt at 19.99% APR

Number of months Balance Interest Amount owing
1 month $1,000 $16.50 $1,016.50
2 months $1,016.50 $16.77 $1,033.27
3 months $1,033.27 $17.05 $1,050.32
4 months $1,050.32 $17.33 $1,067.65
5 months $1,067.65 $17.61 $1,085.26
6 months $1,085.26 $17.91 $1,103.17

As you can see, debt adds up fast with compound interest. One of the quickest and most effective ways to slow down the growth of credit card debt is to move it to a lower-interest card through a balance transfer.

How balance transfers work

A balance transfer is the transfer of debt from one or more (usually higher-interest) credit cards to another (usually lower-interest) card in order to slow or stop the accumulation of interest and pay down debt.



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