Debt Consolidation

What is a Balance Transfer Fee?

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While looking around for ways to manage your credit card debt, you may notice offers for balance transfer credit cards. These cards allow you to consolidate your debt from other cards and transfer it all onto a new card that has a very low introductory interest rate. 

This could seem like an appealing option if you’re carrying a load of high-interest credit card debt, but it is important to consider the risks before making a balance transfer. 

Balance transfer fees range from 3-5% on each debt you transfer to your new card. And if you aren’t able to pay off the debt before your introductory period ends, you might be stuck with even more debt than you had to begin with.

So before you take out a balance transfer card, use this article to understand how balance transfer fees work so that you can be sure this is the right option for you.    

What Is a Balance Transfer Fee?

A balance transfer fee is the amount a lender charges to move a load of debt from an existing credit card onto a new card with new terms. It is generally around 3-5% of the amount of the debt being transferred. Different cards have different terms for how much you pay and at what time. 

You can open a balance transfer card at any time, and only pay the fee when you make a balance transfer. Some cards will even offer to waive the fee if you make the transfer within a set period of time, usually 30-60 days after opening the new account. It is smart to pay the full fee amount as soon as you make the transfer. If you do not pay the fee upfront it will be added to your card’s balance and increase the load of debt you carry. 

For example, transferring $2000 onto a card with a 3% fee rate would result in a $60 fee, something you could maybe pay off as soon as you incur the debt. But a higher fee rate on a much larger balance could be difficult to pay off immediately, which would ultimately increase your overall indebtedness. A risky move, to be sure.

Are Balance Transfer Fees Worth It?

You have to do your own figuring to decide if a balance transfer fee is worth it to your particular situation. There are a number of factors to consider here:

1. How Much Debt Do You Have? 

If it is a relatively small amount you are confident you can pay back quickly, the risk of a balance transfer card may be small. But if you have a large load of debt over $10,000 and don’t know exactly how you are going to pay it off during the introductory period, the risk of getting deeper into debt is much higher.

2. What Are Your Current Interest Rates Compared to the Balance Transfer Card’s? 

If your current card’s rates are higher than the balance transfer card’s rates will be after the introductory period, this could work in your favor. Because if something comes up that makes you unable to pay off the debt before the introductory period ends, you would still end up accruing interest at a slower pace. 

Calculate the amount of the balance transfer fee in addition to the debt you will carry onto the new card, and figure out what size payments you would need to make each month in order to pay off the debt before the intro period is up.

Let’s say you’re in the scenario cited above, transferring $2000 to a card with a 3% fee and a year-long introductory period. $2000 x .03 (or 3%)  = $60. With the $60 fee added to your debt, you’re looking at a new debt of $2060. Divide that new debt load by a 12-month introductory period, and the resulting necessary monthly payment of $171.66 could be totally manageable. 

3. Can You Pay Off the Debt Before the Introductory Period Expires? 

Ultimately the most important factor to consider is whether or not you can pay off the full amount of the balance transferred before the introductory period ends. The main appeal of balance transfer cards is the interest-free introductory rate, so if you continue to carry a balance after that intro period, you won’t succeed in getting out of the debt and may end up with even more debt than when you started.

Should You Use a Balance Transfer Card to Pay Off Debt?

If you can pay off the entire balance on your debt before the introductory period ends, you could end up saving a lot of money on interest. But if you can’t pay off the debt before the introductory period ends, the interest rate on your balance transfer card could end up being the same or even more than you were paying when you transferred the debt. 

Balance Transfer Card Pros Balance Transfer Card Cons
Interest-free introductory period 3-5% balance transfer fees
Consolidate multiple debts into one payment Potentially high interest rate if you don’t pay down the debt before the intro period ends
Potentially move a debt from a high interest rate card to a lower interest rate card The fee adds to your debt if you don’t pay it up front

Ultimately the low introductory rates of balance transfer cards could really help you to leverage your debt into a more manageable consolidated sum. BUT! You must use these cards wisely, be fully aware of the fees and terms involved, and make consistently large enough payments to fully pay off your debt before the introductory period ends. Otherwise, you’re just transferring your debt from one place to another and putting yourself at risk of getting even deeper into debt.

Kate Robinson Beckwith is a freelance writer who loves to use her way with words to help people get a better understanding of their finances. She lives in the Bay Area where she spends her weekends taking in culture, making books, and hiking with her husband and her goofy three-legged pitbull mix.