When Should You Pay a Balance Transfer Fee?
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When you're whittling away at a mountain of credit card debt, a high interest rate can make your balance decrease at a glacial pace. Thankfully, a balance transfer credit card with a 0% introductory APR can help you pay down your debt faster by offering you a reprieve on interest for a year or more. But there's a catch: If you transfer your balance, you'll likely need to pay a balance transfer fee.
Given the typically high ongoing APRs on credit cards, paying this fee can often make sense, but not always. Here's what to keep in mind.
It's possible to find credit cards with no balance transfer fee, but those products are rare and often come with caveats. For instance, some credit unions may offer them, but you'll have to be a member to qualify. Other cards may skip the balance transfer fee but won't offer a 0% intro APR.
How much does it cost to transfer your balance?
Balance transfer credit cards offer consumers a way to roll debt onto a card with a lower interest rate. Generally, these cards offer a 15- to 21-month period where interest won't accrue at all.
But in exchange for that reprieve on interest, the vast majority of these balance transfer cards come with a 3% to 5% balance transfer fee. So if you have a credit card balance of $10,000, it would likely cost you $300 to $500 to transfer your debt to a balance transfer card.
While that's a big chunk of money, it could be worth it in the long run.
Should you transfer your debt?
All things being equal, paying a balance transfer fee is worth it as long as it's cheaper than what you'd pay in interest by continuing to carry a balance on your current credit card (which it most likely will be).
For example, if you carry an average daily balance of $10,000 for a year with 15% interest, you'd accumulate roughly $1,500 in interest by the end of the year. That's significantly more expensive than the $300 to $500 balance transfer fee you'd pay.
Even if you won't be able to pay off your entire balance by the time the introductory APR ends, transferring your balance can still save money, since you'll get a reprieve on interest for over a year.
But remember, interest accrues over time, while a balance transfer fee is an immediate, one-time charge. So if you're planning on paying off your debt in the next couple of months, paying a balance transfer fee could be more expensive. Let's say you're planning on paying off your $10,000 balance in the next two months. With a 15% APR, you'd accrue roughly $250 in interest. That's lower than what you might expect to pay for transferring the balance in the first place.
Balance transfer cards generally offer waived interest, meaning that interest won't start to accrue until the introductory period ends. However, some store cards with financing options and cards marketed toward medical debt offer deferred interest. In this case, interest will accrue in the background during the 0% APR period. If you pay off the entire balance before the 0% APR period ends, you won't have to pay any interest. But if you don't, you'll need to pay interest on the entire amount retroactive to the purchase date, not just on the remaining balance.
Consider other options, too
Balance transfer credit cards are a great way to pay off credit card debt. And even though you'll most likely have to pay a balance transfer fee, it often pales in comparison to the interest you'd incur by leaving the debt where it is. Still, balance transfer credit cards aren't right for everyone. Here are other options to consider:
Debt consolidation loan: If having access to multiple credit cards would tempt you to overspend, applying for a balance transfer credit card could do you more harm than good. Instead, you could consider a debt consolidation loan, a type of personal loan that allows you to consolidate multiple debts into one loan with one payment. Unlike balance transfer credit cards, you won't find a 0% introductory APR on these types of loans. But you could get a significantly lower APR than you currently pay, potentially even in the single digits.
Create a debt repayment plan: If you have less-than-ideal credit, you might have trouble qualifying for a balance transfer credit card. In this case, your best course of action might be to put a plan together to pay down the debt quickly. Start by examining your spending to see whether there are any expenses you can cut to free up as much money as possible to put toward your debt. Then create a workable strategy that you'll be able to follow.
Nonprofit credit counseling: If your debt is causing you to have trouble paying other bills or you can't figure out how to get out of debt on your own, a nonprofit credit counselor can help you figure out your next step. If you can't get out of debt by budgeting alone, a counselor might recommend a debt management plan, which rolls debt into one payment with a lower APR. But unlike debt consolidation loans, debt management plans often have a monthly fee and startup costs. In some cases, issuers may even close your credit card accounts.
» MORE: Paying off debt: Tools and tips
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