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Balance Transfer Fee Explained: What It Is and Do You Have to Pay It?

Credit cards can be tempting to overuse. A swipe here and a swipe there and before you know it, you're racking up debt like it's a competitive sport. Although this can happen to even the best of us, finding yourself in this scenario might be a good wake-up call to start paying off the balance more aggressively.

Balance transfers aren't a get-out-of-jail-free card, but they may be able to help you get your debt under control. However, some balance transfers might come with a hefty fee you have to pay.

So, what is a balance transfer fee, and how can you avoid it? 

What is a balance transfer?

A balance transfer happens when you move your debt, usually a credit card balance, to a new account, such as another credit card.

Why would you move your debt around, especially if it means you'll pay transfer fees?

It's usually all about the interest rate. Credit card companies may offer low introductory rates—sometimes as low as 0.00% if you qualify. When you transfer your balance, you can get the lower interest rate, which can help you pay down your debt faster or at least save money on interest.

Keep in mind that the lower rate is often only temporary. It can last several months, but then it may jump to a higher rate if you don't pay off the credit card balance. 

What is a balance transfer fee?

Before you get too excited about an attractive new interest rate, it’s worth keeping in mind that you’ll probably have to pay a balance transfer fee.

Balance transfer fees are the amounts credit card companies charge when you initiate a balance transfer. It's usually a percentage of the balance transfer amount. Most credit card companies have a minimum balance transfer fee that you'll pay if the percentage is lower than that amount.

You'll pay a balance transfer fee whenever you make a transfer. Say you initially transfer $1,000 to the new card, which has a balance transfer fee of 3%. You'll pay a $30 transfer fee, which typically goes onto your new credit card balance.

Maybe you decide you also want to transfer a smaller $200 balance to the new card, which would result in a $6 transfer fee. Now, let's say the company has a minimum transfer fee of $10. In that case, you'll be charged the higher amount of $10 to perform the transfer.  

When does a balance transfer fee apply?

Not all credit cards have balance transfer fees. Some companies waive the transfer fees as a way to attract consumers. 

If the card charges a balance transfer fee, you'll be hit with it every time you move a balance to the card. It's a one-time fee that happens at the time of transfer. 

It's important to read the fine print of the balance transfer offer to know whether you'll pay a fee. You can also negotiate with the company to see if you can negotiate to get rid of the fees or at least lower them.

Pros and cons of balance transfers

So, let’s say you're thinking about doing a balance transfer, even if it means you'll pay transfer fees. Before you start shifting around your debt, make sure you know what you're getting into. Reviewing the pros and cons can help determine whether it's the right financial move for you. 

How it can benefit you

Balance transfers can be a smart option in some cases. Here are the potential perks of moving your debt:

  • Reduction in interest: If you have a high interest rate on your current credit card debt, the lower interest rate on a balance transfer card can save you money. You can put more cash toward the balance, instead of paying it toward interest. 

  • Debt consolidation: Say you have several smaller credit cards with higher interest rates. A balance transfer can move them all to one new card, simplifying your debt into a single monthly payment. 

  • Faster payoff period: You could potentially pay off your debt faster with the lower interest rate. You can pay your debt down aggressively while you're in the lower interest rate period to eliminate your debt in record time. 

  • Improved credit score: If you use a balance transfer to pay your debt down quickly, it could help boost your credit score. As you pay down the balance, you may improve your debt utilization ratio and could see an increase in your score. 

  • Better perks: The terms of the new credit card could be better than your old one, such as rewards for your spending. Compare the terms and perks of the new card to your current card to see what you're gaining.

Why it might hurt

Those pros are pretty tempting. But like so many things in life, there can be some potential downsides to a balance transfer, including the following.

  • Fees: The balance transfer fee could eat into the potential savings you're getting with the lower interest rate. You might still save money, though, especially if you're diligent about paying the debt down quickly. 

  • Limited lower interest period: All good things come to an end eventually, including your lower interest rate. If you don't pay off the balance before the interest rate hike, you could end up paying a lot more than you expected. 

  • Temptation to charge more: Once you transfer your balance to the new card, the old card suddenly has a larger amount of available credit. Giving into the temptation to charge more could make your financial situation worse. Cutting up the old card and tackling your money mindset can help you avoid this trap. 

  • Tough qualifications: If your credit needs some work, you might have a tough time qualifying for a credit card that allows balance transfers. Even if you're approved, you might not get the best interest rate possible. 

  • Penalties and fees: Making a late payment on your balance transfer credit card could have some expensive consequences. You'll likely have to pay a late fee, and you might lose your promotional interest rate immediately.

  • Transfer limits: Like all credit cards, a transfer card has a credit limit. If that limit is lower than the amount you want to transfer, you likely won't get the advantage of the lower interest rate on all your debt.

When does it make sense to pay a balance transfer fee?

No one wants to pay extra fees, but sometimes paying a balance transfer fee can make sense. 

Sure, it's extra money out of your pocket, but it could still be a lower amount than all the interest you're paying on your current card. That's especially true if you're carrying over your balances month after month.

Here's a quick way to decide. Pull up your last few credit card statements. How much are you charged each month in interest?

Now, calculate what you'd pay in transfer fees. Multiply the balance you want to transfer by the percentage. For a 3% balance transfer fee and a $2,000 balance, multiply 2,000 by 0.03 to get $60. 

Depending on your interest rate and balance, you could be paying close to the transfer fee each month in interest alone. If the new card has a 0% interest offer or a significantly lower interest rate, you could end up paying a lot less interest, even when you factor in the transfer fee. 

Activating a balance transfer, even with a fee, usually makes the most sense if you plan to pay off the balance within the promotional period. You'll usually save more than the amount of the fee in reduced interest.

If you don't pay it off before the interest rate jumps, you could end up paying just as much or more in interest. On top of that, you paid the balance transfer fee. 

When deciding whether to do a balance transfer, crunch the numbers and think about your plan. Are you going to get serious about paying it down while the interest rate is low? Or are you just tempted by a shiny new offer with no real intention of paying off the debt fast?

Skip the fees

As we mentioned before, not every balance transfer credit card charges fees. Some companies eliminate transfer fees to make their offer more appealing. For some credit cards, the fees might be waived for transfers made within a certain time frame after opening the account. 

Shopping around can help you find a credit card offer without a fee or with a lower one. Even better, some companies may be willing to work with you if they know they have competition. Try to negotiate a lower fee with the company to save yourself money. 

Tips for paying off debt with a balance transfer

A balance transfer can be a good way to pay off credit card debt, but it's not a lottery jackpot or a golden ticket that wipes away your debt. It still takes work and commitment to chisel away at your balance. Here are some tips to get the most out of your balance transfer:

  • Take time to find the best deal: Compare the terms and fees on all the credit cards you're considering to find the best option. Look at the interest rate, both during the introductory period and after. Make sure you know how long you'll get the lower interest rate.

  • Make a payoff plan: Calculate how much you need to pay each month to pay off your balance before your promotional interest rate ends. Put any extra money you have toward the balance to make sure you pay it off completely before your interest rate jumps. 

  • Don't miss a payment: Being even a little late on your payment could cancel your promotional deal. That sudden increase in interest means you're losing the financial benefits of using the balance transfer in the first place. 

  • Change your money mindset: Living within your means, curbing your spending, and relying less on credit cards can help you avoid landing in the same position in the future. 

Alternatives to balance transfers

Don't want to deal with balance transfer fees? Can't qualify for a balance transfer credit card? You could have other options for paying off your debt, including:

  • Loans: If you qualify for a secured or unsecured personal loan, you could use it to pay off your credit cards and have a lower interest rate.

  • Aggressive payments: Even if your current interest is higher than you want, you could keep your balance there and get aggressive about paying it. Slash your spending in other areas and throw any extra money that comes your way toward the balance. 

  • Negotiations: Some credit card companies are willing to negotiate payoffs with you or a lower interest rate on your existing account. This can help you pay off the amount faster. 

  • Debt counseling or relief: These services can help you budget and create a payoff plan or negotiate on your behalf with creditors to reduce your debt. Research any debt relief companies thoroughly to make sure you can trust them. 

Arming yourself with what you need to know about making a balance transfer can help ensure that you’re making the right decision. With lower fees and interest rates, you may be able to tackle your debt more quickly and gain greater stability with your financial future.

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