In the video segment below, Motley Fool analysts Michael Douglass and Nathan Hamilton answer a user-submitted question about credit cards APRs, debt, and balance-transfer credit cards with 0% promo APRs.
Douglass: Alice asks, "What difference in interest rate would make it worthwhile to apply for another credit card with a lower interest rate?" This is a great question. I think we first have to say, it's going to differ for different people. I'm assuming here, maybe incorrectly, let's say you're somebody who's carrying a balance. You had mold in your basement so you had to put $10,000 on your credit card to get that cleaned out, it was kind of an emergency thing and you didn't really have time to line up any other financing, so you have $10,000 on your credit card, and you're paying 25% APR on it. At that point, I would say, what you really want to try to do is get a 0% balance transfer.
Hamilton: You read my mind.
Douglass: We've been working together long enough, I guess.
Hamilton: Yeah, if you look at the economics and financials behind it, $5,000-10,000 balance, if you're paying that off with the minimum payment, it's going to take far longer than you would even think before running the numbers. I would say, in this situation, specifically, Alice, there are a bunch of calculators online that are available if you look on Google and say, credit card interest calculator, search on those terms, you'll find several of them that will probably help you answer that question specifically for your situation. But, the broader theme of what might make sense is, there are balance transfer credit cards out there where you can get a promotional 0% rate on balance transfers for 12 months, up to 21 months, some of the market. In many cases, it's going to make sense to do that, and even pay a fee to transfer those balances. You're going to come out ahead if you're able to not pay interest over those time frames. Compounding interest is a beautiful thing for us as investors. It makes us richer when we're investing.
Douglass: Unfortunately ...
Hamilton: With credit cards, we're investing in improving somebody else's balance sheet, we're improving the bank's balance sheet, not ours. So, it works against us in terms of debt. You have to run your personal numbers, but definitely, reducing the rate can have a huge impact.
Douglass: Yeah. A balance transfer card is definitely a great thing to check out. We have a list of our picks for the best ones of 2017 at fool.com/creditcards. Check us out there and feel free to reach out if you have any other questions.