What is a 'Balance Transfer Fee'

A balance transfer fee is a fee charged by a lender when a borrower transfers another debt to an existing loan or line of credit.

BREAKING DOWN 'Balance Transfer Fee'

A balance transfer fee applies to balances moved from one line of credit to another, such as between two credit cards. Credit card companies frequently offer low-percentage “teaser” interest rates between zero and 5 percent to entice borrowers into consolidating debts from other lenders. These rates typically revert to higher rates after six to 12 months.

Balance transfers offer a win-win for lenders and borrowers given the right conditions. As long as the combined cost of the balance transfer fee and effective interest rate reduces the overall cost of repayment, a borrower will come out ahead on a balance transfer compared to keeping the balance in place and paying it off at a higher interest rate. From the lender’s perspective, balance transfers yield cash flows in the form of the balance transfer fee, as well as incremental earnings from debts that until recently sat on another issuer’s line of credit.

Calculating the Effect of a Balance Transfer on Cost of Borrowing

Borrowers considering a balance transfer should be sure to calculate the total cost of borrowing for scenarios with and without the transfer. Elements in this equation include the current interest rate, the amount of time a borrower expects the debt to remain in repayment, the balance transfer fee and the ongoing cost of interest payments after the transfer, both during and after any promotional period.

For example, at a 20-percent interest rate, a credit card balance of $10,000 would result in an annual interest expense of $2,000, or about $167 per month. Suppose a credit card issuer offered a balance transfer fee of 1 percent with a promotional interest rate of 2 percent over the first 12 months after the transfer. The total cost of borrowing includes the transfer fee of $100 plus total interest payments of $200 for a total of $300. The borrower would save $1,700 over that period versus holding the balance on the old card.  

Note that these costs only concern interest payments on the outstanding debt. The balance transfer buys time, but it does not eliminate the principal, which the borrower needs to pay eventually. Credit card holders with chronic balances could easily end up on a balance transfer carousel, paying transfer fees to move debt around without ever actually repaying it. In those cases, the borrower would likely do better to pursue other forms of debt relief, such as consolidation loans, debt restructuring or, in extreme cases, bankruptcy declaration.

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