Credit Card Expert Roundup #50 - Balance Transfers
Credit card companies entice consumers with long APR's to try to motivate them to grab their business and in the process, save, through balance transfers. Yet, many of these longer 0% terms come strapped with a balance transfer fee. Is it in the best interest for a consumer to move an existing balance to a new card with long rate that has a fee, even if there is an option available with maybe a shorter 0% term with no fee?
Jason Steele asks our experts to address this when he asks them in our 50th edition of the Credit Card Industry Expert Roundup series, the following question:
Is it a better idea to apply for a credit card and move existing balances to a 0% balance transfer offer with no fee or to a 0% balance transfer credit card with a fee if the option with a fee allows for greater savings over the total life of the 0% term? Is it always a better idea to go with the no fee option? If not, please explain.
Ben Luthi - Credit card expert and personal finance freelance writer
I wouldn't worry about the fee itself so much as the total savings. Card issuers typically don't require you to pay that fee out of pocket when you request the transfer — they tack it onto your balance. So you'll end up paying the fee over the course of the promotional period along with the rest of the balance. So yes, it is nice if your new credit card doesn't charge a balance transfer fee. But if you can get a longer 0% APR period with another card and save more in interest charges even after the balance transfer fee, go with the card that provides more net value.
Also, it's important to consider that some balance transfer credit cards that charge a balance transfer fee also offer rewards and a sign-up bonus. If you're assessed a $150 balance transfer fee and you can earn $150 after spending $500 in three months, you can use that bonus to help pay down your balance and effectively neutralize the fee.
So when you're comparing balance transfer cards, it's important to look at the whole picture: the balance transfer fee, the promotional period, the rewards program, the sign-up bonus, etc. Think about how you're going to be using the new card and pick the one that will give you the best total value.
Eric Rosenberg - Finance writer at Personal Profitability
If you want to move a credit card balance for a 0% balance transfer offer, it's important to consider the total cost over the long-term. You should never move a balance to a card that has a higher interest rate after the introductory period ends. If you do, you could wind up paying a lot more in the long run. Balance transfer fees are worth it if you will save money in total, not just for a year or so.
The best way to use a 0% balance transfer offer is to pay off your balance for good. Take advantage of the 0% period to pay down the balance without facing the headwinds of interest charges. If you can do that, a balance transfer fee may be well worth the cost. If paying a few percentage points today will halt monthly interest payments at 15%, 20%, or more, and you can pay off the full balance during the 0% period, you're almost certain to come out ahead.
It will come down to the math, but I think it would be extremely rare to beat a waived balance transfer fee.
First, assuming you would be paying off your transferred balance in a reasonably short amount of time, say 15 months or less, then it comes down to the math. In this case I would say that most of the time, you will come out ahead by transferring to a card with no balance transfer fee - noting that there are very few cards that even offer the option of a no-fee 0% balance transfer. The best deal I know of right now is the Amex EveryDay® Credit Card, which has a promotion for both 15 months at 0% on a balance transfer offer as well as a waived fee to do the transfer.
Contrast that with the longest available Balance Transfer offer I'm aware of at the moment - the Citi Simplicity. That will give you 21 months at 0%, but charge you a whopping 5% on the transfer. At that point, while my first thought is that you would still generally be better off transferring the balance again to a new 0% card than to pay the 5% fee, what if you were afraid you wouldn't get approved for a second 0% card? That's where the decision comes in.
Let's run the math on a $10,000 balance. You could have 15 months and simply pay down that principal or, to get 21 months, you'd be paying down $10,500 as those extra 6 months are costing you the $500 BT fee. But if you had 15 months and then went to a 20% APR for the last 6 months, that would cost you an extra $1,000 in interest. In short, you have to evaluate how long you expect to need to pay down your balance along with your odds of being able to extend your 0% APR by shifting to a new card in order to determine the best choice for your own situation
Emily Guy Birken - Former educator and freelance writer specializing in personal finance
When taking advantage of a 0% balance transfer offer from a credit card, trying to decide whether to accept an offer that comes with a balance transfer fee can make it really tough to know what to do. After all, paying money to take advantage of a chance to save money seems like a contradiction in terms. While the best option will always be a no-fee 0% balance transfer, that doesn't mean you should never accept a 0% balance transfer option that does have a fee. To determine if the fee is worthwhile, ask yourself if you will spend less on the fee than you would spend on interest with your original card. If the answer is yes, paying the fee may be worthwhile. It's also a good idea to look at what other benefits you might enjoy because of the fee--specifically, if you get more time to repay your balance at a 0% interest rate than you might with a no-fee 0% balance transfer.
Allison Kade - Millenial Money Expert and Editorial Director at Fabric
On this question, I think it comes down to simple math. When you say that the option allows for greater savings over the life of the card, are you talking about a lower interest rate for the future? Cash back?
If we are talking about rates for carrying a balance, my recommendation would be to just focus on not carrying a balance before trying to optimize anything else too hard. Then beyond that, if we are talking about something like points or perks, I'd just do the math on how many perks I expected to receive over time, compared to the cost of the fees. Whichever works out better would be the winner.
Miranda Marquit - Founder of Planting Money Seeds
In general, it’s really about running the numbers, plus figuring out what works best for your situation. At first glance, it might seem like avoiding a fee makes the most sense. However, if one card has a longer 0% APR offer and you know you’ll need those extra few months to pay off the debt, you could actually see high overall savings by deciding to accept the fee. Carefully run the numbers to see which option provides the best long-term savings for your level of debt and the situation.
Next, consider other perks you might be getting with the card. Are you also getting the card because of a big singing bonus or rewards program? Once the balance transfer is paid off and you’re using the card on a regular basis, what type of experience, perks or rewards can you expect. A small upfront fee might be worth it to you if the long-term benefits of a signing bonus that offsets the fee, plus rewards you can earn and know you’ll use are considered.
There’s no one right answer. You need to carefully consider the options, the realities of your situation, and the long-term value of what you’re getting.
Jacob Wade - Founder IHeartBudgets.net
You need to run the numbers.
It’s all about the PAYOFF PLAN!
Let’s say you have a credit card with a $10k balance at 18%
Option 1: $10k balance at 18%, balance transfer to NO FEE card at 0% for 12 months. Option 2: $10k balance at 18%, balance transfer to 3% FEE card at 0% for 18 months.
Using option 2 means you’re adding an additional $300 to the balance. So now your debt is $10,300.
But now you get 18 months instead of 12.
Does your debt payoff plan have you paying this card off in 18 months? Or less?
If you can pay it off sooner, then you DON’T need the longer term.
If not, you can save additional interest utilizing the longer term….but are you saving $300?
Let’s say your balance for the last 6 months (months 12 – 18) is $3,000, then you would pay about $150 at the previous 18% rate.
As you can see, if you are actively paying off the card and the balance is getting smaller, the longer term doesn’t really help. And if you are NOT paying it off quickly enough, then you have an income or budgeting problem, not an interest rate problem!
My take: Get on a budget, create a payoff plan, and THEN assess which transfer option is better. But without a plan to pay off the debt, you’re just kicking your interest rate down the road and NOT getting ahead.
Russ Nauta - Owner Credit Card Reviews
I was always a firm believer that it's best to go with the no fee balance transfer option. From a a pure math standpoint, you can save the money from the fee, pay off some of the principal and the perform another balance transfer down the road if necessary; preferably with no fee but even with one, you still save more money. That was my belief that is, until I read Ben Luthi's answer where he starts talking about sign-up bonuses. For rewards people, it does make sense to factor in credit card bonuses as they can offset balance transfer fees. While it is a safer approach from a budgetary standpoint to not make purchases on a balance transfer card, if you can responsibly and cash in on a bonus, this would change my answer.