What’s the better balance transfer deal?
Question: >I want to tranfer about $2,000 from a bank line of credit onto a >credit card with a much lower interest rate, but I don’t know how to >figure out which would be the better deal over time. Card #1 has a >6.9% rate for the life of the transfer and no transfer fee, Card #2 >has a 5.9% rate, also for the life of the transfer but with a 3% >transfer fee. I’m generally pretty good with math, but for some reason >I just can’t get a handle on interest rate math. BTW, this balance >will probably not be paid off any time soon. Any help is muchly >appreciated. Thanks 
In order to evaluate which will cost the least over the life of the loan, you need to know the life of the loan. Since you’re looking at credit cards, this is somewhat under your control – you can pay it off faster than at the minimum rate though you can’t pay it off slower.
So you can probably forget about doing interest rate calculations. Assuming you’re going to take the maximum time to pay off the loan, what’s the monthly payment for how many months going to be for each option? Multiply the two (payment times months) for each option. The lowest figure “wins”.
But one other consideration. You don’t say what the bank line of credit stems from or the interest rate on it is. But very often such things are home equity loans and as such qualify for a mortgage interest tax deduction. Assuming that’s the case and you’re in a 28% tax bracket and itemize, it could be cheaper over the long haul to pay the higher monthly charge, write it off on your taxes and get it back come refund time. For instance, if the line of credit rate is 9%, the simple annual interest would come to $180. That would go on your tax return on Schedule A and would reduce your tax bill by $50.40, so your net after tax cost would be $129.60, for a net simple interest rate of 6.48% which would mean going with card #1 would cost you money overall. Transferring the loan to a credit card would mean giving up the deduction.
That calculation is a little naive on several points, and I have no way to judge how accurate the assumptions are in your case, but it may serve to illustrate the point.
Answer: The tax deduction stuff is interesting, I didn’t know that, but unfortunately it’s not a home equity loan. It’s tied to my checking account and it’s supposed to be for overdraft protection….things just got a little out of hand recently. The interest rate on the line of credit is 14%. As far as what the life of the loan will be if I tranfer the balance, considering that this is only part of my total debt, probably at least a few years barring a miracle. Does this help any?
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