I recently received an email with an enticing offer: 2.99% balance transfer for the life of the balance. I usually dismiss these sort of offers because I'm really happy with my current credit cards and I know that I've got great rates right now. However, for the sake of education, I decided to compare this offer with my current situation and figure out what was better for me.
The card offering the balance transfer offer is Pentagon Federal's Platinum card. I used this as a gas charge card because it offers a 5% rebate on gas purchases. I pay it in full each month and never pay any interest on this credit card. The default interest rate on this card is 13.99%, which quite high compared to my regular credit cards which are at 6.00% and 7.99% and don't have any balances on them either.
The balance I'm interested in transferring is my home equity loan. At a little over $24,000, it is a lot of money! We structured the loan aggressively, paying a little over $1000 per month. We pay 5.65% interest on this loan, which means this month we'll pay $119 in interest.
As I begin to consider the math, there is a lot to consider:
Balance Transfer Fees: Pentagon Federal charges a balance transfer fee of 2.5%, with a minimum fee of $10 and a maximum fee of $100. Balance transfer fees are one reason that I don't usually consider balance transfers. However, with the $100 maximum fee, it seems that would pay for itself within two months. So I keep doing math.
- Credit Utilization: Moving this balance from the home equity loan to the credit card would effectively max out this credit card. This will temporarily decrease my credit scores. We don't plan to make any big purchases in the next 24 months, so I decide this is OK with me.
The Default Interest Rate: If I somehow manage to mess something up, and fail to pay on time one month, this $24,000 in debt is now at 13.99% interest. That would be disastrous and exactly the opposite of what I'm trying to accomplish here. How could I prevent this from happening? Most banks have some provision for making automatic payments. I don't usually keep much money in my Pentagon Federal regular bank account, but I could move some of my emergency funds to that account and set it up so that it will automatically pay the minimum payment if I fail to make a payment during a billing cycle. This seems like it would cover me for the possibility that I could somehow fail to make a payment and wreck this good deal.
Payment Application: If I transfer a balance, I'm not going to be paying off my entire balance on this card every month. I'm going to start accruing interest, including interest on my gas purchases upon which I'm I'm not currently paying interest. The transferred balance will be at the 2.99% promotional rate, but the new gas purchases will be at the default 13.99% rate. The representative couldn't exactly tell me how payments would be applied, but she said that "most" of my payment would be applied to the balance at the lower interest rate. Standard industry procedure is to pay off the balance with the lower rate first, then pay off the balance with the higher rate, so I'm going to assume that is what Pentagon Federal will do as well. There are two ways I could proceed: a) In order to maximize this deal, I'll have to stop charging my gas to this card and pass up the 5% rebate, or b) I can factor the 13.99% interest on the gas purchases into my calculations. This isn't a huge problem, but it is one more factor to consider.
Interest Deduction: We are currently able to deduct the interest on our home equity loan on our federal income taxes. However, because my husband is deployed this year, we will be in a very low tax bracket (probably 10%). The interest on this loan is about $800 for the rest of this year, which means approximately $80 in interest deductions lost. Next year the interest will only be about $651, but we're likely to be in a higher tax bracket (probably 15%), so the interest deduction lost would be about $98. There's about $100 worth of interest in the third year, for another $15 or so in lost deduction, for a total estimated lost deduction of $193.
Here's what I'm looking at: I make amortization tables for my current loan, and the balance transferred at 2.99%. In my current loan, I will pay a total of $1404 in interest. At the transferred rate, I will pay a total of $737 in interest. Even if I add the $100 fee to transfer the balance and $193 in income tax deductions lost , that is a savings of $374 in interest over 24 months.
These calculations assume that I stop using the gas card and just have the transferred balance on this account. Now I need to factor in the gas/rebate/interest rate factor. I average about $100 in gas purchases per month, which means I earn about $5 in rebates each month. Multiply that times 24 months and that is $120 less in rebates, bringing my total savings to $254 for 24 months.
But what if I keep using this as a gas card? I'm still getting the rebates, but I'm paying 13.99% interest on the accumulating gas balance. That means $1.65 the first month, then $3.30 the second month, until I finally am paying $32 in interest the 24th month. When you add up all that interest, it equals $383 in total interest, minus $120 in rebates, for a net of $263 in interest paid on the gas purchases. Subtracting the $263 in gas interest from my balance transfer savings decreases the total savings to only $111 dollars for the 24 months. Clearly, continuing using this account as a gas card isn't the best plan.
So, what should I do? I can transfer the balance, pay the $100 balance transfer fee and lose the interest deduction, and save $254 in interest over two years. That seems like an obvious choice, but I'm still not convinced. Plus, I have a nagging feeling that there is some other factor to consider. What do you think?