While looking 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 with a 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’s important to consider the risks before making a balance transfer. One factor to consider is the balance transfer fee. So, what is a balance transfer fee, and will it make your debt situation better or worse?
Before you take out a balance transfer card, get a better handle on how balance transfer fees work so you can be sure it’s 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’s generally around 3-5% of the amount of debt being transferred. Different cards have different terms for how much you pay and when.
You can open a balance transfer card at any time, and only pay the fee when you make the transfer. Some cards will even offer to waive the fee if you transfer the balance within a certain time, usually 30-60 days after opening the new account. It’s smart to pay the full fee amount when you make the transfer because otherwise it will be added to your card’s balance and increase your overall debt load.
For example, transferring $2,000 onto a card with a 3% fee rate would result in a $60 fee, something you might be able 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?
Once you get past the ‘What is a balance transfer fee?’ question, you have to figure out if it makes a balance transfer worth it in your case. You’ll need to do your own calculations based on your particular situation, but here are a few factors to consider:
1. How much debt do you have?
If it’s a relatively small amount you’re 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 and don’t know exactly how and when you’re going to pay it off, the risk of getting deeper into debt is much higher.
2. How do your current interest rates compare to the balance transfer card’s?
If your current card’s interest rates are higher than what 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. On the other hand, if the post-promotional interest rate is higher than your current rate and you’re not sure you can pay off the balance before it would take effect, think twice.
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 have succeeded in getting out of the debt and could end up with even more debt than when you started.
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 promotional period is up.
For example, if you transfer $2,000 to a card with a 3% fee and a one-year introductory period, your total debt after the transfer is $2,060. Dividing that by a 12-month introductory period, and the resulting necessary monthly payment of $171.66 could be totally manageable.
Should you use a balance transfer card to pay off debt?
If you can pay off the entire balance on your credit card debt–including the balance transfer fee–before the introductory period ends, you could end up saving money on interest. But if you can’t, and the interest rate on your balance transfer card goes up to the same or higher rate than you were paying when you transferred the debt, you could be worse off.
|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, a balance transfer cards could help you leverage your debt into a more manageable, consolidated sum. But you need to use them wisely, be fully aware of the terms involved, and make large enough payments to fully pay off your debt during the introductory period. Otherwise, you’re just transferring your debt from one place to another and putting yourself at risk of getting even deeper into debt.
Get help with your credit card debt
If you’re considering a balance transfer card, you may be struggling with debt or just worried about falling behind on payments. If so, it might be time to take action. Freedom Debt Relief is here to help you understand your options for dealing with your debt, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a better financial future.
- Balance Transfer Credit Cards Can Be a Good Deal—for Some People (Washington Post)
- Families Still Drowning in Consumer Debt, Adding to Financial Insecurity (Forbes)
- How to Get Out of Debt (Freedom Debt Relief)