Dear Dollar Stretcher,
We are all bombarded by offers for new credit cards at amazingly low "teaser" rates and often transfer checks offering those same low rates for transferring high interest balances to their card. I have used these checks from time to time when the teaser rates expired on other cards, but was surprised recently to find out that one company was charging $25 per check for using them. I won't use them, since even at 12 or 13 percent, transferring balances and then being charged so much for the transfer didn't seem like a huge savings. I now am curious again about transfers, to get those debts and their extra interest charges onto a "cheaper card". For instance, I'm still getting offers for more cards, the latest one for a "fixed" rate of around 7%. Frankly, I get lost in the math.

Susan asks a good question. How do you decide if it's a good idea to move your balance from one credit card to another? Every one has a different rate and sometimes it seems very confusing. Let's see if we can't shed a little light on the subject.

First, we'll look at interest rates and interest payments. Yes, there is a difference. The interest rate is the way that we measure the cost of borrowing money. The rate determines how fast your debt adds up. The rate is generally stated as a percentage for borrowing the money for a one-year period. The interest payment is the amount of money you're paying in interest. It is not a percentage, but a dollar amount. Why do we care? Well, because the interest rate is part of the formula we use to get the answer (the interest charge). The first step to answering Susan's question is to understand the difference.

Now let's take a look at the formula. Once you understand how it works, it's not that difficult. You can do it with the help of a calculator. To determine how much interest you'll pay, multiply the amount of money you've borrowed by the interest rate. Then multiply that answer by the length of time you've borrowed the money. We'll work through an example. Suppose you owed $600 on your credit card. The interest rate was set at 14%, and you expected to pay it off in seven months when you get your year-end bonus. To find out how much interest you'll pay, multiply $600 by 14% (0.14). Then multiply that answer by 7/12 (7 months out of one year or 0.6). Your answer should be $600 x .14 x .6 = $50.40.

Let's walk through that problem so that it's very clear to you. The first step says that if you borrowed $600 for one year it would cost you 14% or $84 ($600 x 0.14). But you only borrowed it for 7 months. That's 7 divided by 12 or 0.6 of a year. So you multiply $84 by 0.6 to get the $50.40 in interest charges. Working with the amount owed and the interest rate is fairly straightforward. It's usually the time that tends to confuse things. Why don't we try the same problem with a different length of loan? This time we'll say that for some strange reason we expect to need the money for two years and 53 days. The first part is the same as before: $600 times 14%, or $84. But, how do you figure two years and 53 days? We do it by breaking it into two parts and then adding them together. First, the days. Fifty-three days is 53/365 of one year, or 0.15 of a year (53 divided by 365). Add that to the two years and you have 2.15 years.

Remember that $84 was for one year. So if we multiply by 2.15, we'll get $180.60 in interest charges. Sometimes it's hard to know if your answer is right. Think of it logically. Once you know how much interest you'd pay over one year, you can use that for a comparison. In our first example we were borrowing the money for a little over half a year (7 months), and $50 is just a little over half of $84. In our second example we know that our answer needs to be a little over two times the $84.

Now, let's see if we can apply this math to Susan's question. She has an offer to move some debt from a 13% card to a 7% card. She doesn't say specifically, but we'll assume that the $25 transfer charge is for this offer. We'll also assume that she's the typical consumer with about $400 on her card. Should she do it?

Start by filling in the blanks. The amount owed is $400. Next the interest rate. Instead of multiplying by 13% or 7%, we really need to know how much interest Susan will be saving if she shifts the balance. To figure that we need to compare the two rates. So we'll subtract the new rate (7%) from the old rate to get a 6% reduction in interest rates.

So if we saved 6% on $400 for one year, we'd save $24 ($400 times 0.06). But because Susan has to pay a $25 fee, she would need to carry the balance for just over a year before she would actually save any money. Specifically, she would need to carry it for 1.04 years ($25 divided by $24).

You can do the same thing with any transfer fee. Just divide the fee by the annual savings and you'll know how long before the new, lower rate saves you money. Your answer will be in years.

To answer Susan's question: no, there's really no easy "rule of thumb" answer. There are just too many different rates and transfer fees to make that possible. But if you know the amount of your balance and quickly figure out the potential savings in interest charges you can decide whether an offer is helpful.

There's no reason to be afraid of the math. In fact, without it you can't make a good decision about managing your debts. And, that's the quickest way to give money to your credit card company without getting anything in return. So the next time you get one of those teaser transfer invitations, pull out your calculator and credit card statement. In just a few minutes you'll know whether to fill out the application or reroute it to the "round file."