One of the reasons that debt can be so difficult to tackle is that it often comes with high interest rates.
When you have debt, you not only have to pay off the principal balance (the amount of money you originally borrowed), but you also have to make interest payments, which grow your balance.
One way to get out from under steep interest rates is to do a balance transfer.
However, you've likely heard warnings about balance transfer fees. Are they worth it? Well, it depends on the size of your balance, how much time you need to pay it off, and what the current interest rate is on your debt.
What Is a Balance Transfer?
A balance transfer involves transferring debt from a credit card or loan to a brand-new credit card.
In most cases, it only makes sense to do a balance transfer when you can achieve a lower interest rate than you’re currently paying.
Many balance transfer cards offer a temporary promotional offer of 0% APR. It typically lasts 12 to 15 months, although some can last as long as 21 months.
During the promotional period, you won’t have to make any interest payments on the transferred balance. This can make it a lot easier to allocate more money towards the principal balance and pay off your debt faster.
It's important to pay off your balance completely before that promotional period ends and the regular interest rate kicks in.
READ MORE: How to Do a Balance Transfer the Smart Way
What Is a Balance Transfer Fee?
The balance transfer fee is usually a set percentage of the transfer amount that the credit card issuer adds to your new balance.
You need to crunch the numbers on whether paying it makes sense. For example, if you're not saving enough in interest to cancel out the cost of the fee, you won’t benefit financially.
Some credit cards offer promotions such as a low balance transfer fee or no balance transfer fees, so it’s always a good idea to shop around for the best possible deal.
How balance transfer fees work
Here's a quick example of how it works:
Let’s say you have a credit card balance of $1,000 that you want to transfer to a new credit card. The balance transfer fee is 3%. That equals a $30 fee and a balance on the new credit card of $1,030.
Spend some time researching different credit cards to see which one comes with the lowest balance transfer fee and the longest 0% APR intro offer. That way, you can get out from under your debt even faster.
But remember: If the credit card doesn't have a 0% APR intro offer, or if you don’t pay off your balance in full before the period ends, your increased balance can lead to paying more in interest.
RELATED: Why It’s Hard to Get Out of Debt With Only Minimum Payments
Calculating Balance Transfer Fees
You need to crunch the numbers to determine if a balance transfer fee is worth it. Consider these main factors:
- Fee amount: How high is the balance transfer fee, and how much will it add to your debt balance?
- Intro APR: Does the card come with an introductory 0% APR period? If so, how long is that period, and how much of your debt can you pay off before it ends?
- Regular APR: Once the promotional period ends, what is the regular APR? Is it lower than the APR you currently pay? How long will you need to pay that rate before you can pay off your balance in full?
- Annual fee: If the credit card comes with an annual fee, is it worth paying to do your balance transfer?
If you can pay off all or most of your balance before the intro APR period ends or can get your hands on a lower interest rate than you currently pay, then paying a balance transfer fee is probably worth it.
You can use a free online balance transfer calculator to get an idea of how much money a balance transfer can save you.
FAQs
How much are balance transfer fees?
Typically, balance transfer fees are a set percentage of the balance you transfer onto the new credit card. Usually, these fees range from 3% to 5%, but some balance transfer cards don’t charge this fee at all.
How much will it cost in fees to transfer a $1,000 balance?
This depends on the credit card. For example, if the card charges a 5% balance transfer fee, then you would pay $50 on a $1,000 balance, but if it's 3% you'd only pay $30.
The credit card issuer adds the fee amount to your credit card balance, so you may also need to pay interest on that amount.
TL;DR: Are Balance Transfer Fees Worth It?
Balance transfer fees typically range from 3% to 5% of the amount you're transferring — whether it's worth paying depends on how much you'll save in interest. If you can snag a 0% intro APR and pay off most or all of your debt during that period, the fee usually pays for itself.
Just remember to pay off your balance before that intro rate expires. Otherwise, you could be stuck paying interest on a higher balance than you started with.
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