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This is a financial math question for you people much smarter than me:

With credit card bonus transfers where your fee is added to your balance up front----how do you find out the interest rate? What's the formula or spreadsheet equivalent?

For example, if you take a $1,000 loan at an interest rate of 3% per year, but pay, say, $50 a month, you wind up paying less than $30 per year in interest, because the balance you pay interest on decreases every month, and you wind up paying less than 1,030.

But with the credit card balance transfer offers, where you end up paying throughout the year, and the fee is on the original total amount ... seems like you effectively pay more than 3%, right? 

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Yes, the balance transfer fee becomes part of the total (capitalized) if you don't pay the balance in full. The reason you might want to do that is if the credit card offers no interest or low interest for a certain time period and it were cheaper than a personal loan.

BNizzle said:   Yes, the balance transfer fee becomes part of the total (capitalized) if you don't pay the balance in full.
  I thought the BT fee was supposed to be paid on the first statement with the BT? It is ok to just pay the minimum and ignore the BT fee until the 0% rate expires?

rufflesinc said:   
BNizzle said:   Yes, the balance transfer fee becomes part of the total (capitalized) if you don't pay the balance in full.
  I thought the BT fee was supposed to be paid on the first statement with the BT? It is ok to just pay the minimum and ignore the BT fee until the 0% rate expires?

  Chase's BTs the fee is added to the balance and can be paid down with the BT.  Any balance is capitalized when the introductory 0% rate expires.  Not sure of other banks

rufflesinc said:   
BNizzle said:   Yes, the balance transfer fee becomes part of the total (capitalized) if you don't pay the balance in full.
  I thought the BT fee was supposed to be paid on the first statement with the BT? It is ok to just pay the minimum and ignore the BT fee until the 0% rate expires?

  The minimum payment due is the minimum payment due.  Some card issuers add the BT fee to the minimum payment for that statement, others just include it in the account balance used to calculates the minimum payment due.  Some issuers may accrue interest charges on the BT fee portion of your balance, in which case you'll have to pay in excess of the minimum due to pay down that amount.  

Don't pay BT fees.

Keybank requires first month payment in full of the BT fee. Other banks typically don't, IME.

basil25mint said:    seems like you effectively pay more than 3%, right? 
  
Yes.

If you were to make equal monthly payments, you could use an Annual Percentage Rate (APR) calculator like this one: http://www.calculatorsoup.com/calculators/financial/apr-calculat... The balance transfer fee would be considered a prepaid finance charge. This works because APR includes loan origination fees (as opposed to a simple interest rate).

Edit: This assumes you pay in equal installments, which you probably aren't for a 0% offer. I don't know if there is an online calculator to calculate the actual rate if there are unequal payments, you might be able to use a balloon rate calculator or something, but it wouldn't be too difficult to make one in Excel.

Edited again: See below for an example in Excel, as well as what happens if the balance transfer offer is more than a year.

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BT percentage fee
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I think one way to do it would be to divide the amount of the fee by the average monthly balance and then annualize by dividing that result by diving the number of months and multiplying by 12. If your balance transfer promo period is longer than a year, it may actually result in the effective interest rate being lower than the balance transfer fee. Quick-and-dirty example attached.

You may also be able to use Excel's XIRR function to handle more complicated cases, but I'm not terribly familiar with it and this example is simple enough that quick-and-dirty worked well.

basil25mint said:    seems like you effectively pay more than 3%, right? 
 

  
It all depends on how long it takes you to pay off the loan.  In the case of a promo rate less than 3%, the effective rate could be less if you take more than a year to pay off, and the promo rate lasts that long.

But yeah, if the interest rate is higher than 3%, the effective rate will never be less than 3%. To calculate, the simplest formula would be i / p * (12 / m) where i is dollar amount of interest and fees only, p is principle, and m is how many months to pay off loan.

I wonder if a CC company can charge you interest on the BT fee even though the BT offer has a 0% interest rate.

Front-loaded fees aren't interest. That's how they can get away with charging an effectively gigantic APR without violating usury laws.

A 0% BT for a year with 3% BT Fee is equal to a 3% APR - most of the BT with 3% BT Fee is offered at 16 Months effectively reducing the effective rate to below 3%.

​On the other hand I rarely see personal loans offered below 3%, and if you do receive that kind of offer then I say its better than your typical 0% BT with BT Fees. Per my observation , most of the credit card companies offering BT with BT Fees capitalize the BT fee as part of the original BT.

I decided to get creative and make a spreadsheet to calculate the APR for a balance transfer; see attached.

You input the balance transfer $, BT fee %, the minimum payment in % and $, and the term. I created it so the term can go up to 36 months (it will let you enter a higher number, but will calculate at 36 months). The sheet will calculate the APR. The minimum payment $ is mostly unimportant, unless you use a low balance transfer amount or a high minimum payment %, but I included it for those cases.

I believe from the OP you are talking about a 0% interest balance transfer offer with a >0% fee. You can play with all of the variables with this sheet. (Although I didn't make it so that you can enter an actual interest rate, which some BTs might carry; that's for another night.)

As others have said, you are correct that the fee being paid up front does effectively make the APR higher, if the terms is 1 year (with one caveat - if there was no minimum payment [which isn't allowed anymore anyway], the APR would equal the BT fee), but it could be less if the terms is more than 1 year. The caveat here is that if the minimum payment is relatively high, the APR could still be > the BT fee (well) past 12 months.

Interestingly, the sooner you pay off a BT with a 0% rate but with a BT fee, the higher the APR because you could essentially pay a 3% fee up front, and then only keep the balance for a few months, greatly increasing the APR. This explains why if you increase the minimum payment required, the APR will go up.

Anyway, play with the sheet. Please. It took me a little while and I should be sleeping.

You can check the calculation by making the minimum payment (% & $) 0, and the APR will equal the Fee for 12 months, or be half for 24 month, etc.


12 mos, 0 pmt
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18 mos, 2% pmt
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Hmm...I can't open the excel attachments on my previous post. I hope others can, or maybe they have to be approved first. Either way, here are a couple shots of the sheet.


EradicateSpam said:   http://www.bankrate.com/calculators/credit-cards/credit-card-bal...
  
That doesn't calculate the effective APR including the transfer fee, which is the whole point of this thread.

Don't get into the balance transfer trap... trust me! It just never seems to go away. It is better to starve and make paydown payments (larger than the minimum--2x, 3x,4x etc). I am finally getting out of my balance transfer cycle that has lasted 6+ years now.

feddgee has a point, I started one last year replacing part of down payment after buying house, am up to ~$30k floating at Chase at ~2% effective APR. Of course in my case I'm diverting funds to max ira and 401k....  I don't have my plan fully fleshed out for next year, although I expect not having a big tax bill next april due to bad market returns and itemizing taxes this year.

feddgee said:   Don't get into the balance transfer trap... trust me! It just never seems to go away. It is better to starve and make paydown payments (larger than the minimum--2x, 3x,4x etc). I am finally getting out of my balance transfer cycle that has lasted 6+ years now.
  What's the trap??  If you can make 2x,3x,4x paydown payments, you're still way better off doing that on a 0% card for 12-17 months (even after the 3% transfer fee) then paying the interest on a 15-20% card for that time.  The only trap is if the rate jumps to 25% or so after the promotion period.  Pay it off, pay it way down, or look for another transfer deal before then and you'll come out significantly ahead.



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