DEFINITION of 'Balance Transfer Fee'

A fee levied by a credit card issuer when a balance is transferred to its credit card.  A balance transfer fee can range from a low of 1% to as high as 5% of the transferred amount. Balance transfer fees generally go hand-in-hand with special “teaser” interest rates that can be as low as zero percent, but that are only applicable for a period that is usually six to 12 months, after which time interest rates on any outstanding card balance will revert to the usual levels.

A balance transfer fee may be worth paying for people with high levels of credit card debt, as the upfront cost may be more than offset by the savings on credit card interest expense.

BREAKING DOWN 'Balance Transfer Fee'

For example, at a 20% interest rate, a credit card balance of $10,000 would result in interest expense of $2,000 annually, or about $167 per month. A balance transfer fee of 1% with a promotional interest rate of 2% would result in a total cost of 3% or $300, for a saving of $1,700 on interest expense, which works out to a substantial $141 per month. The fiscally prudent thing to do would be to apply these savings to repayment of existing debt.

Some noteworthy points about balance transfers and the fees involved –

  • Balance transfers may be offered on new cards or on existing cards. Card issuers may offer lower balance transfer fees to new card users, in order to entice them to switch.
  • Transfer fees may be negotiable, but you will not know unless you ask for a lower rate. Card issuers may be willing to negotiate lower rates if the transferred amount is quite large.
  • The transfer fee should only be one of the factors to consider when deciding on a balance transfer. Other factors to take into consideration include the regular interest rate on the card (once the promotional period expires) and whether monthly payments at the promotional interest rate can be easily managed, since even one missed payment may result in a significantly higher rate.
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    The extent of the hit to your credit score depends on credit utilization. Read Answer >>
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