Understanding Balance Transfer Fees and How to Navigate Them

At O1ne Mortgage, we prioritize consumer credit and finance education to help you make the best financial decisions. If you’re struggling with high credit card balances, a balance transfer credit card offering a low or 0% introductory annual percentage rate (APR) on transferred balances could be a viable solution. However, it’s essential to understand the associated balance transfer fees and how to manage them effectively.

How Balance Transfer Fees Work

Balance transfer fees typically range from 3% to 5% of the amount transferred. For instance, if you transfer a $5,000 balance to a card with a 3% balance transfer fee, you’d pay $150. If the fee is 5%, you’d pay $250. Some cards charge different fees depending on when the transfer is completed relative to the account opening date.

In addition to credit card debt, balance transfer cards can sometimes be used to pay off other loans, such as personal loans or home equity lines of credit (HELOCs). When you request a balance transfer, the card issuer may pay the lender of the transferred debt directly or send you a check to pay it off yourself. The amount transferred, plus any balance transfer fee, becomes the balance on your new card. For example, transferring $2,000 to a card with a 5% balance transfer fee would result in an initial balance of $2,100 on the new card.

Are Balance Transfer Fees Worth It?

A balance transfer fee can be worth it if the fee is small compared to the amount you can save on interest by making the transfer. For example, if you get a balance transfer card offering a 0% introductory APR for 21 months with a 5% balance transfer fee and transfer a $5,000 balance, you’d pay $250 in fees. The total balance on your new card would be $5,250. Paying $250 per month would allow you to pay off the balance in 21 months without incurring additional interest.

In contrast, if you continue paying $250 per month toward the $5,000 balance on your original credit card with an APR of 20.68%, it would take 25 months and $1,133 in interest to pay off the balance. Choosing the balance transfer card would save you $883, even after the $250 balance transfer fee.

To maximize savings, you must pay off your transferred balance before the promotional period ends. After that, any remaining balance will accrue interest at the new card’s standard APR, potentially reducing or canceling out the savings from the balance transfer.

How to Avoid Balance Transfer Fees

The only way to avoid a balance transfer fee is to choose a card that doesn’t charge one. These cards can be hard to find, but you can look for a card with a low balance transfer fee as an alternative. When comparing cards, consider the following factors:

• Other fees: Annual fees, late fees, or foreign transaction fees can add up if you travel a lot or occasionally forget to pay your bills on time.
• Length of the low or 0% introductory APR: Longer promotional periods can make it easier to pay off a large balance before the introductory APR ends.
• The standard APR: What will your APR be after the promotional period ends? If you plan to keep using the card or can’t pay off your balance within the introductory period, a lower APR will save money on interest.
• Time limits on balance transfers: Some cards require transferring your balance within 45 days of opening an account to qualify for the low APR. Others give you several months, offering more flexibility.
• Low or 0% introductory APRs on purchases: Some balance transfer cards offer promotional APRs on purchases as well as balance transfers.
• Rewards: While rewards shouldn’t be your primary focus when consolidating debt with a balance transfer card, if the other features of two cards are equal, consider choosing the one with better perks.

Best Practices for Completing a Balance Transfer

Once you’ve chosen a balance transfer card and been approved, follow these steps to complete the transfer:

• Know both the introductory APR and the ongoing APR: Understand the rates that will apply to any remaining or new balance after the promotional period ends.
• Check the time frame for completing the balance transfer: It may take several weeks for a transfer to complete, so act quickly if there’s a short window to get the promotional APR.
• List the balance, APR, creditor, and account number for each debt you want to transfer: Add up the balances to ensure you know the total amount to transfer.
• Find out your credit limit and balance transfer limits: Keep in mind that any balance transfer fee will be added to your total. Some card issuers let you transfer a balance up to your credit limit, while others have smaller transfer limits based on their policies or your creditworthiness.
• Request a balance transfer from the new card issuer: Be ready to provide information about the debts you’re transferring, such as your account number, outstanding balance, and the name of the creditor.
• Wait for the new card issuer to pay off the debt: You may receive a check or deposit to your bank account to pay off your other creditors, or the card issuer may pay them directly and move the debt to your balance transfer card.
• Ensure the transfer is complete: Keep making payments on the debts you transferred until you’re sure the transfer is complete and have confirmed that your old cards or loans have zero balances. A late payment on your old accounts, even if a transfer is in process, will appear on your credit report and could negatively affect your credit score.
• Understand the card’s terms: Check the details of your new cardholder agreement. For example, will a late payment cost you your introductory APR or trigger a higher penalty APR?
• Begin paying off your new balance: Divide your new balance by the number of months or billing cycles in the promotional period. Pay that amount each month to pay off your balance before your 0% introductory APR ends.

The Bottom Line

Getting approved for a balance transfer card typically requires good or excellent credit, which is a FICO® Score of 670 and above. Before applying for a balance transfer card, check your credit report and credit score. Bringing late accounts current and paying bills on time can help improve your credit score. Additionally, signing up for services like Experian Boost® can quickly boost your FICO® Score by adding on-time utility, cellphone, streaming service, and eligible rent payments to your Experian credit report.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey and make the best decisions for your future.