According to a recent report from Bloomberg, Bank of America intends to raise balance transfer fees from the industry standard 3% to 4%, a new high for this growing source of fee revenue for banks. This 30% increase in balance transfer fees, scheduled to take effect on June 1st, marks a continuation of a disturbing trend that has dramatically increased the cost of balance transfers over the past 15 months.
The Rise of Balance Transfer Fees During the Credit Crunch
At this time last year, Bank of America offered no fee balance transfers tied to credit cards with 0% introductory rates that lasted 6 months. In late 2008, Bank of America increased these fees across nearly every card, to a flat 3% fee with no maximum.
Bank of America was not alone in raising balance transfer fees last year. Discover, which had offered no fee balance transfers for a number of years, began charging a 3% balance transfer fee with a $75 maximum in 2008. Later in the year, Discover eliminated the $75 fee limit and began charging a full 3%.
Citibank was one of the first banks to charge a full 3% fee with no limits, though in early 2008 it still offered a handful of credit cards that charged no balance transfer fees. Today, they continue to charge 3% fees.
In 2008, Chase also raised the balance transfer fee on many of its credit cards, eliminating the $75 maximum fee and charging a full 3%.
Impact on Consumers
Rising balance transfer fees pose a number of issues for consumers, though the main problem may be psychological. Increasing balance transfer fees from 3% to 4% will cost consumers $10 for every $1,000 they transfer via 0% balance transfers. A person with a 15% interest rate who transfers a balance to a credit card that offers a 0% APR for 1 year will save approximately $110 a year per $1,000 transferred if there is a 3% fee vs. $100 a year with a 4% fee. In the long run, getting a 0% balance transfer is going to provide substantial savings so long as fees don’t reach 6%. Unfortunately, a 4% fee may be a deterrent, causing consumers to defer transferring balances.
It is this psychological effect that may do more damage to consumer wallets than the fee increase. A consumer with $10,000 on a credit card with a 15% interest rate may get sticker shock when he or she see they will be paying $400 in balance transfer fees. This may lead these consumers to overlook the fact that they will save about $1000 in interest by transferring their balance to a 0% credit card.
The Temporary Silver Lining
Impending increases in balance transfer fees signal, at least temporarily, that 0% balance transfers will not be pulled from the market altogether. This is very good news, though the elimination and/or shortening of 0% introductory deals is definitely still a looming possibility. In the early 2000’s, a standard balance transfer deal provided a 2.9% rate for 6 months to 1 year and included 3% fees. Increasing competition for credit card customers drove these rates, along with the associated fees, down to zero when credit was flowing freely.
Unfortunately, this blog has been nervously anticipating the disappearance of 0% balance transfers for the past 6 months. Fortunately, this has not come to fruition. Nevertheless, anything and everything is possible these days, and securing a 0% APR should not be taken for granted. Not only will fees be increasing, but it is entirely possible that interest rates will rise and introductory periods will decreases.
What Should You Do
If you’re sitting on a pile of high interest credit card debt, you should actively seek out a 0% balance transfer as soon as possible. With fee increases on the immediate horizon, transferring balances today will save you an extra 1%. More importantly, however, the potential for shorter introductory periods or increased teaser rates is still a massive threat. With all these factors conspiring against consumers, it is more important than ever to lock in a 0% rate for a year. Doing so will not only decrease your interest expense this year, but, more importantly, it will shorten the time it takes to get out of credit card debt substantially.
To learn more about current balance transfer offers and apply online for approval, please see the 0% balance transfer section of this website where you can compare current offers and apply online for approval.
To learn how much a balance transfer can save you, please see our balance transfer calculator.
