What Is a Balance-Transfer Fee?

A balance-transfer fee is the amount of money charged by a lender to transfer existing debt from another lender. The fee is usually a percentage of the total amount transferred.

Balance-transfer fees are common for credit cards that offer a low introductory interest rate.

Key Takeaways

  • A balance-transfer fee is a one-time charge to transfer a balance from one lender to another, often 1% to 3%.
  • Balance-transfer fees are common for credit cards that offer a low introductory interest rate.
  • The lender discloses future rates usually in broad and variable ranges.

How Does a Balance-Transfer Fee Work?

Credit card companies offer low-percentage teaser interest rates or introductory rates to entice consumers into applying for cards and transferring balances to them. Once approved, the borrower transfers an existing balance from another credit card to the new card or consolidates debts from a number of lenders into one debt payable to the new lender.

The teaser rates can be as low as 0% to 5%. The rate typically reverts to a higher percentage after six to 18 months. The lender discloses the future rate usually as a broad and variable range, such as 15.24% to 25.24%. 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 fee of 3% is common.

Special Considerations

A 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 balance-transfer fee. However, only consumers with very good credit scores are approved for cards with no transfer fee.

Advantages and Disadvantages of a Balance Transfer

The allure of a balance transfer is the opportunity to pay off a substantial debt more quickly at a low or even zero interest rate. It works 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 the cardholder won't pay off the entire balance during the introductory period, or at the very least that they will take on more debt that won't have been paid off before the higher interest rate kicks in.

Example of a Balance-Transfer Fee

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.

The bank is betting that the cardholder won't pay off the entire balance during the introductory period.

For example, a credit card balance of $10,000 at a 20% 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% for an introductory period of 12 months, with a balance transfer fee of 1%. If the consumer takes that deal, the total cost of moving the entire $10,000 is $300 (the transfer fee of $100 plus interest payments of $200). The borrower would save $1,700 over the year.

The Bottom Line

Balance-transfer fees can mean that cardholders with chronic balances end up on a transfer carousel, paying fees to move debt around without ever actually repaying it. 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. The fee then becomes worth the effort and money.