If you don’t understand how this fee works, you might get screwed…
Yes, I know this is a very basic “credit cards 101” type topic to bring up, but I’ve seen a few people who are new to credit cards asking this question, so I thought it would be good to address it.
What is this transfer fee on credit cards?
When you transfer a balance from one credit card to another, you will typically be charged a balance transfer fee. It is charged by the card you are moving the balance to (not the card you are moving it from).
How much is it?
So what are these transfer fees going to cost you? Most of the time it’s around 3 to 5 percent of the amount you’re moving over. This is not an interest charge. Rather it’s an upfront fee you are charged immediately.
For example, if you were transferring $1,000 and there was 3% BT fee, then it would be $30.
Even though 3-5% is the typical fee, some credit card offers charge less. Every once in a while, a bank will come out with an offer that gives 0% interest + $0 balance transfer fee. Typically you will see those types of deals in January and February (it’s a popular time because of debt hangovers from Christmas and New Years resolutions). But regardless of the time of year, go here to see a list of the best offers currently available.
If you’re transferring a very small amount (like one or two hundred dollars) then you might be hit with a flat fee instead of $5 or $10:
They do this because if someone is only transferring, say $100, and the transfer fee is 3%, that would only net them $3 and in their book, that’s not enough to be worth it for them. Don’t shoot the messenger though – I’m just telling you what they say!
Many years ago (before the CARD Act reform happened) banks would almost always cap the fee at $50 to $75 no matter how large the transaction was. For example, someone could transfer $25,000 and instead of paying 5% ($1,250) they would only have to pay a maximum fee of $75. Unfortunately those days are long gone – now there is no cap on the fee. So today if you were transferring that $25k with a 5% fee, it would cost a whopping $1,250.
How to do a balance transfer and not get screwed
Now that you know what balance transfer fees on credit cards are, you know why it’s so important to pick the longest 0% deals. Compare the costs over a one year period:
Offer 1 = 0% APR for 12 months with 5% transfer fee
Offer 2 = 0% APR for 6 months with 5% transfer fee
If you did the second offer, you would have to do 2 like that (one every 6 months) in order to avoid paying interest. However you would still be left paying the 5% transfer fee twice, which means over a 12 month period you will have paid the equivalent of 10% in fees! (and even more than 10% if you factor in compounding)
So the solution here is really quite simple. Follow this advice:
- Find the longest offer – Don’t settle for 6 or 9 months! I recommend you go with a credit card that gives you 0% for at least 12 months and preferably longer, if available.
- Keep an eye out for no fee offers – Although extremely rare, no balance transfer fee promotions do come onto the market once in a while. The drawback is that the zero interest period is usually 30-40% shorter than the regular offers.
- Don’t play mind games – One of the dangerous things about balance transfer credit cards is that some people use them as an excuse to not pay off their debt as quickly and/or spend more. Don’t fall victim to this because then you’re not saving money at all!
Here is my constantly updated balance transfers list (the best offers on the market)