What Is a Balance Transfer Fee?
A balance transfer fee is the amount of money charged by a lender to transfer an existing debt from another lender. The fee is usually a percentage of the total amount transferred.
Balance transfer fees are common for credit cards offering a low introductory rate of interest.
- A balance-transfer fee is a one-time charge to transfer a balance from one lender to another, often 1% to 3%.
- The fee is a percentage of the total dollar amount transferred and is added to the balance owed the new lender.
- Before accepting a balance transfer deal, a consumer should consider the balance transfer fee as well as the promotional rate and its duration.
A Detailed Look at Balance Transfer Fees
Credit card companies offer low-percentage “teaser” interest rates or introductory rates to entice consumers into applying for their cards. Once approved, the borrower transfers an existing balance from another credit card to the new card, or even consolidates debts from a number of lenders into one debt payable to the new lender.
The teaser rates can be as low as 0 percent to 5 percent. The rate typically reverts to a higher percentage after six to 12 months. The lender discloses that future rate, but usually as a broad and variable range, such as 15.24 percent to 25.24 percent. The rate the customer actually pays when the teaser rate expires will depend on the individual's credit rating as well as broader market conditions at the time.
In addition, a lender may apply a balance transfer fee to the deal. The consumer pays a fee to transfer an existing balance to the new line of credit. A credit transfer fee of 3 percent is common.
Can This Fee Be Avoided?
An enormous variety of credit card offers is available at any given time, and the wise consumer looks carefully at the terms before making a decision. The teaser rate and how long it lasts are important, as is the amount of the transfer fee. The annual fee, if any, also should be factored in.
On the plus side, some cards offer more generous cash-back deals and miscellaneous other cardholder benefits.
Not all credit card deals charge a transfer fee. However, only consumers with very good credit scores are approved for cards with no transfer fee.
Is a Balance Transfer Worth It?
The allure of a balance transfer is the opportunity to pay off a substantial debt more quickly at a low interest rate or even zero interest. It works, too, as long as:
- The consumer manages to pay off a big chunk of the debt, if not the entire balance, before the teaser rate expires.
- The transfer fee and any other fees (such as an annual fee) do not cost more than the consumer saves over the term of the teaser rate.
It should be noted that the bank, in offering the teaser rate, is betting that you won't pay off the entire balance during the introductory period, or at the very least that you'll take on more debt once the higher interest rate kicks in.
Calculating the Effect
A consumer considering a balance transfer should calculate the total cost of repaying the current debt over time, with and without accepting a transfer offer. Factors include the relative interest rates and fees, and the amount of time it will take to repay the total debt.
For example, a credit card balance of $10,000 at a 20 percent interest rate results in an annual interest expense of $2,000, or about $167 per month. Suppose a credit card issuer offered a promotional interest rate of 2 percent for an introductory period of 12 months, with a balance transfer fee of 1 percent. If the consumer takes that deal, the total cost of borrowing the entire $10,000 is $300, including the transfer fee of $100 plus interest payments of $200. The borrower would save $1,700 over the year.
Notably, this example assumes that the debt is not paid off or even paid down during that introductory period. The consumer's spending habits have not changed, nor has the principal been paid off. Once the teaser rate expires, the consumer is back to square one, paying a high interest rate.
Credit card holders with chronic balances could end up on a balance transfer carousel, paying transfer fees to move debt around without ever actually repaying it.
Clearly, the only way to take full advantage of a balance transfer offer is to commit to paying off the debt, or as much of it as is possible, before the introductory offer expires.