What is a balance transfer fee?

A credit card balance transfer can be a tempting proposition if you have run up a significant debt on your existing cards.

An introductory offer at 0% interest for months on end, or even two years, gives you time to clear those debts without seeing your repayments swallowed up by the high interest charges which prevent you making much of a dent in the total owed. In some cases you can even transfer a personal loan debt to a new balance transfer offer credit card.

Unfortunately, the gloss is sometimes taken off these 0% or low interest introductory offers by the burden of a balance transfer fee. This gives rise to a number of questions.

How much do balance transfer fees cost?

Firstly, it’s important to note that not all credit cards charge a balance transfer fee, so in some cases the balance transfer fee is zero.

For those that do, the fee is typically 1%, 1.5% or 2% of the amount being transferred. In a few cases it could be as high as 3%, and occasionally the fee could be capped, making it cheaper to transfer larger amounts.

This means, for example, that if you were transferring a balance of $5,000 to a new card with a 2% balance transfer fee (and no cap), the fee charged would be $50. If you were transferring more than one balance to the new card, the fee would be levied on each balance transferred.

Can the balance transfer fee be waived?

Possibly. It’s always worth asking the card issuer whether a fee can be waived. The card issuer wants your business, especially if you have a history of putting plenty of purchases through a credit card on a regular basis, because frequent card users earn banks lots of merchant fees. They also hope that card users will add to their profit by paying interest charges, especially by failing to pay off the balance transfer before the introductory offer period expires.

So, if you have a solid history of credit card use for reasonably large amounts, and now have a large balance you would like to transfer, go ahead and try to negotiate a balance transfer fee waiver. If you’re confident that you will be able to repay the full balance before the introductory offer expires, try suggesting that you will accept a higher revert interest rate in exchange for a fee waiver. You have nothing to lose by asking.

Is the balance transfer fee the same, regardless of the amount?

No. A balance transfer fee is not a flat fee, but a percentage of the balance transferred. So, the fee will be higher or lower in line with the balance amount.

There is no tier system in place, where the percentage changes depending on the amount transferred. The same percentage applies, no matter what amount is being transferred or what is being transferred.

Is the balance transfer fee the same no matter what my credit score is?

Yes. Banks usually stick to their advertised balance transfer fee percentage, and apply it to all new cardholders requesting a balance transfer. They don’t alter the fee to penalise people with a low score or reward those with a high score.

But if you do have a particularly good credit score, there’s no harm in ringing the card’s service desk to ask for a fee reduction or waiver. You’ve lost nothing if they decline your request, and they might just say ‘Yes’, especially if you explain that the fee is making their card less attractive than another specific card offer.

Does the balance transfer fee change based on where the balance is transferred from?

No. There’s no doubt that some transfers will take longer to sort out than others, but in most cases it’s a fairly regulated and speedy process. It would not be in the card issuer’s interest to alienate potential customers by penalising them for transferring a balance from a specified competitor.

Why are balance transfer fees charged?

A balance transfer fee is just another name for a credit establishment fee, to cover the cost of the work that credit card companies’ credit assessors need to do before approving your card account application and balance transfer application.

Why do some credit cards have balance transfer fees, while others don’t?

There aren't any Australian credit cards currently charging an account application fee – they are absorbing the cost – and many don’t charge a balance transfer fee.

Those that do charge a transfer fee are hoping to add to their bottom line with extra revenue, while risking that the fee may deter some potential customers from applying. They’re hoping to strike the right balance, which is why you will see the same bank issuing different cards with different transfer fee percentages, or adding and removing transfer fees at different times.

When and how is a balance transfer fee charged?

The balance transfer fee will usually be charged to your new credit card account on the same day the transferred balance is debited to the account. If there is more than one balance to be transferred, there could be several fees occurring on different days.

Balance transfer fees are a one-time fee, not a recurring fee. That is, if your balance transfer introductory period lasts for more than 12 months, you will not be charged a further fee in the second year.

You may plan to avoid using your new card for purchases until you have repaid your transferred balance in full, since in the vast majority of cases you will lose your interest-free days on purchases while you have a transferred balance on the card. But don’t forget that there’s one purchase you have made – the transfer fee, if one was charged. You’ll need to make a repayment to cover the balance transfer fee, otherwise you’ll be charged interest on it.

Is it worth paying a balance transfer fee?

If there’s no balance transfer fee charged, the only maths you need to do, to work out whether it’s worth transferring a balance, is to look at the new card’s annual fee, if there is one.

Annual fee as a cost of balance transfer

If the card you’re transferring to has an annual fee, and you don’t intend to use the card for purchases until your balance is repaid, the annual fee is in effect a balance transfer cost, especially if the balance transfer offer lasts for more than a year (which means you may pay at least two annual fees before you have fully repaid the balance).

Let’s say you are transferring a balance of $2,000 from a card where you are currently paying interest on your debt at 20% p.a., to a new card with a 0% balance transfer offer lasting for 15 months. Assuming that you need to make 2% minimum monthly repayments on the transferred balance, you will save $487 in interest over 15 months. So you would still be well ahead if you had to pay 2 x $100 in annual fees. But if the annual fee were $250 it wouldn’t be with it.

Longer and shorter offers, larger and smaller transferred amounts, and higher or lower transfer fee percentages, will produce different results.

Some balance transfer credit cards may have an annual fee discount or waiver in the first year.

Balance transfer fee as a cost of balance transfer

In the same scenario as above, but forgetting about the annual fee for the moment, the interest saving would still be $487, but a 2% balance transfer fee would cost $40, reducing the net saving to $447. A $100 annual fee, payable twice, would reduce the saving to $247, still worthwhile.

So, paying a fee to transfer a balance to a no annual fee or low annual fee card is clearly worthwhile. But if the card you plan to transfer to is a premium card with a high annual fee, do some quick arithmetic first, especially if there’s a transfer fee involved.

For a rough rule of thumb, if your new card has an annual fee of $350 and you’re paying a 2% transfer fee, you need to transfer a balance of at least $2,000 for a year at 0% to break even. If your offer lasts for two years you’ll be only $27 ahead after paying the $40 transfer fee and two annual fees amounting to $700.

But most people looking at a premium card will probably have a much larger balance to transfer. A $5,000 balance transferred for two years would put you ahead by a net $1,817.

The bottom line

In practice, a balance transfer fee is often a much less significant part of the transfer cost than the annual fee of the new card.

The lowest cost balance transfer with the highest gain is obviously a lengthy 0% offer (two years or more) to a new card with no annual fee and no balance transfer fee. But an offer like that may be hard to find, so you’ll probably have to compromise and do some maths to find out which offer is going to work best for you.