What is a balance transfer fee?
A balance transfer fee is a charge imposed by credit card issuers when you transfer the outstanding balance from one credit card to another. It is typically expressed as a percentage of the amount being transferred. The purpose of this fee is to cover administrative costs and generate revenue for the card issuer.
It's important to consider the balance transfer fee when evaluating the potential savings of transferring your balance. While some credit cards offer promotional periods with no balance transfer fees, others may charge a fee ranging from 2% to 5% of the transferred amount. Understanding and comparing these fees will help you make an informed decision.
Key takeaways:
- A balance transfer fee is a charge imposed by credit card issuers when you transfer your credit card balance to another card.
- The fee is typically a percentage of the amount being transferred.
- It's important to consider the balance transfer fee when evaluating the overall cost-effectiveness of a balance transfer.
How does a balance transfer fee work?
When you initiate a balance transfer, the new credit card issuer may charge a balance transfer fee as a percentage of the amount being transferred. Here's how it works:
1. Determine the fee structure: Before proceeding with a balance transfer, review the terms and conditions of the new credit card to understand if a balance transfer fee is applicable and the specific fee percentage.
2. Calculate the fee: If a balance transfer fee is charged, calculate the fee amount based on the percentage specified in the terms. For example, if the fee is 3% and you are transferring £2,000, the fee would be £60 (3% of £2,000).
3. Consider the overall cost: Evaluate the potential savings from the lower interest rates or promotional offers against the balance transfer fee. If the savings on interest charges outweigh the fee, a balance transfer can still be beneficial.
Real world example of balance transfers
Let's say you have a credit card with a £5,000 balance and decide to transfer it to a new credit card with a promotional offer of 0% interest for 12 months. However, the new card charges a 3% balance transfer fee. In this case, the balance transfer fee would amount to £150 (3% of £5,000). If you anticipate saving more than £150 in interest charges during the promotional period, the balance transfer could still be a cost-effective choice.
Final thoughts on balance transfers
A balance transfer fee is a charge imposed by credit card issuers when you transfer your credit card balance to another card. It's typically a percentage of the amount being transferred and covers administrative costs for the card issuer. When considering a balance transfer, it's essential to evaluate the balance transfer fee alongside the potential savings from lower interest rates or promotional offers.
By comparing the fee with the projected interest savings, you can make an informed decision on whether a balance transfer is financially beneficial for you. Be sure to carefully review the terms and conditions of the new credit card and calculate the fee to assess the overall cost-effectiveness of the balance transfer.