Reaping Your Rewards

Example shows switching credit cards has become costly

Switching credit cards once was easy and inexpensive, but has become less so, especially for people with less-than-perfect credit. The example below shows that for a person who has many of the average characteristics of a credit card shopper in the market that exists in early 2009, the cost is estimated at about $235 for a person with a $7,300 credit card balance. The calculation factors in the balance transfer fee and time involved in looking for a new credit card.

What’s the cost of transferring a balance?
When balance transfers were everywhere and fee-free, it was quick and easy and an automatic financial win to jump between cards. Today, with credit tightening and balance transfer fees common, the math has changed. calculated the cost of one such transfer, using examples as close to today’s real-life market as possible.
Balance transfer fee
Upfront balance transfer fee of 3%Amount transferredFee (3%)
Expenditure of time costs
 Time (in hours)Hourly wage rateCost
Time spent changing 2 recurring automatic payments from old card to new (via Internet)0.17$18.79$3.13
Time spent applying for new credit card online0.17$18.79$3.13
Time spent evaluating direct mail or online credit card offers to choose the best card for your needs0.50$18.79$9.40
Grand total$234.66
Notes, methodology, assumptions

Whether switching your credit card will cost anything close to the example outlined above — and whether that nets out to be a moneymaker — depends on a number of factors. Among them:

  • Savings on interest. Switching to a low-rate or 0 percent interest rate card for a six-month introductory period can reduce the overall interest you pay on the outstanding balance. The amount of that savings depends on how long it takes to pay off the balance once the rate adjusts to its normal level, the amount of monthly payments and whether other transactions (i.e., cash advances or purchases) are charged to the account.
  • Credit scores. Canceling an older credit card can impact your credit score and affect the ability to get other credit cards and loans. The dollar value of this cost depends on a number of variables but should be considered when switching credit cards.

Methodology and assumptions: For the transfer amount, we used a credit card with an outstanding balance of $7,300, the average amount of credit card debt in 2007 according to the Consumer Finances Survey published by the Federal Reserve in February 2009. 

This example assumes the consumer is making two payments a month using recurring automatic payments to the old card. A study released by the Federal Reserve in October 2008 says the number of payments initiated on billers’ sites is unknown. However, rewards card users frequently sign up for such payment methods to boost spending for rewards points.

Time cost: What is the value of your time? The closest estimate is what workers are paid by employers. According to the U.S. Department of Labor’s Bureau of Labor Statistics, the average wage for a nonfarm, production nonsupervisory worker was $18.49 in January 2009.

For information on your particular situation, see our Balance transfer calculator

See related:Barriers rise to switching credit cards, Balance transfers 101

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