Balance transfers are traditionally used to get a better deal on your credit card balance by moving what you owe to a new credit card with lower fees or lower interest rates. How much money will they really save you though? Or more importantly, is there any chance they could actually cost you? Depending on your credit card usage, they actually can.

A Costly Credit Card Mistake

Let’s first assume that you have a $2000 balance on a credit card you regularly use for purchases. Let’s also assume it’s a low interest credit card like the Citibank Clear Platinum Credit Card with a 11.99% interest rate (now only 10.99% at the time of publishing) on that purchase-driven balance.

Now let’s factor in one more thing: you know you’re soon going to be adding another $2000 to your balance when you use your credit card to book your next holiday. You decide it’s the perfect time to transfer your balance to a new card to cut on your interest payments before accumulating a larger debt. You opt for the CUA Rewards Credit Card, which offers you an introductory 2.9% interest rate on a $2000 balance transfer, and a regular interest rate of 17.99% (which will apply to your new charges).

Why might this be a mistake?

It might sound like a better deal to have $2000 at 2.9% and $2000 at 17.99% rather than the full $4000 at 11.99%. What seems logically sound would be wrong though. You see, many credit cards don’t apply your payments to the higher interest portion of your balance. This means your low balance transfer rate doesn’t have a long opportunity to really work for you.

How You May Pay More

Let’s assume that you pay $500 in your first 30-day billing cycle, and $1000 in your next cycle. Let’s figure out the interest you would pay in each situation. To arrive at these numbers you would divide your APR (interest rate) by 365 days in a year to get the daily rate. Then you multiply your balance by the daily interest rate and then by the number of days (30).

No balance transfer: After paying the $500, your next month’s interest would come to about $34.49. When you make the next $1000 payment, your next interest payment would be $24.64. Your total interest during that time period would come to $59.13.

With balance transfer: This time we assume the bank requires payments to be applied to the lower interest rate balance first, as many do. We also have to make two interest calculations (at 2.99% for part of the balance and 17.99% for the new purchases), and we add them together. After your $500 payment being applied to your transfer balance, you’ll pay interest of $33.26. When you pay off another $1000 (also applied to the balance transfer), your next month’s interest comes to $30.80. In the first month, you seemed slightly ahead. But by the second month, the higher interest rate caught up with you. In the end, you pay more total interest with a total of $64.06.

What’s even worse is that, once you’ve paid off your balance transfer completely, you’re stuck with a higher 17.99% interest rate on your full balance and future purchases. In this case a balance transfer wasn’t the smart decision. That doesn’t mean they can’t be. It just means you need to fully understand how you plan to use that new credit card before applying (such as using it only for the balance transfer versus adding new charges before it’s paid off). With some careful planning, you can anticipate what your total fees and interest will add up to, helping you compare balance transfer offers more thoroughly with the deal you already have.