Although President Obama and the House of Representatives are bringing attention to the most egregious and unfair credit card practices, an important credit card fee that has risen dramatically over the past twelve months has garnered little to no attention. This is the balance transfer fee charged by banks when consumers shift their high interest credit card debt to credit cards with short term, 0% introductory rates.
Balance transfer fees have flown under the regulatory radar largely because consumers who utilize 0% balance transfers are more than happy to pay them in exchange for a massive reduction in their interest rates. However, balance transfer fees have risen exponentially over the past year, vastly increasing the price consumers must pay to take advantage of a popular debt refinancing option that has helped many consumers get their credit card debt under control.
To get a sense of just how dramatically these fees have risen in the past 12 months, let’s look at the year over year change in the costs of transferring $10,000 from a high interest credit card to one that offers a 0% APR for 1 year. For starters, a year ago today, a handful of credit cards offered no fee balance transfers. While this type of offer was more readily available two years ago, it was still possible for a consumer to get a 0% APR for 1 year and pay no fees at this time last year.
While no fee balance transfers were available a year ago, the vast majority of credit card companies charged a 3% fee that was capped at $75 per transaction. Thus, a person who did a $10,000 balance transfer would be charged $75, or .0075%.
As the credit crunch intensified in the fall, credit card companies removed the $75 maximum fee and began charging a full 3% of the balance transferred. Thus, the cost of a $10,000 balance transfer increased by 400% from $75 to $300.
While it is an understatement to call a 400% fee increase dramatic, it is still a pittance compared with the amount of money the consumer would save by transferring money from a credit card with a 15% interest rate to a card with a 0% rate, as the interest savings would be close to $1,000.
0% balance transfers are a great deal, even with 3% fees, as they can ultimately save the average consumer with a 15% interest rate anywhere approximately $100 in interest costs for every $1,000 transferred. Given the current state of the economy, we are all very lucky to have 0% rates at all.
Unfortunately, balance transfer fee increases are once again on the horizon. On April 15th, Bloomberg.com reported that Bank of America will be raising balance transfer fees to 4% on June 1st. Our analysis of this development yielded some stark but obvious conclusions. Since banks tend to emulate one another, it is only a matter of time before more banks begin charging 4% balance transfer fees.
Given the dramatic increase in average balance transfer fees this past year, we believe consumers who would benefit from 0% balance transfers should act quickly before more companies increase fees. Paying 3% or even 4% in fees is a drop in the bucket to the interest expense carrying credit card debt accrues. However, it may only be a matter of time before banks cease offering 0% interest rates for 1 year and begin offering 2.9% or higher rates as they did in 2001.
If credit card companies raise fees and increase introductory rates, getting out of debt with balance transfers will not be nearly as easy as it is today, let alone last year.
Given the fact that it is highly unlikely that either the President or the Congress will effect any changes in balance transfer fees, consumers should continue to happily pay 3% or even 4% to take advantage of 0% balance transfers. However, 0% rates may not be available for long, so consumers should act now while these deals are still readily available.
For additional details on current 0% offers, please see the balance transfer credit card comparison section of this website where you can compare deals and apply online.
April 24th, 2009 at 2:06 pm
you noted: “While it is an understatement to call a 400% fee increase dramatic, it is still a pittance compared with the amount of money the consumer would save by transferring money from a credit card with a 15% interest rate to a card with a 0% rate, as the interest savings would be close to $1,000″
now, I am not an expert, but I do not think that a 0% for 12 months intro period would save you 1000 bucks, since the % rate post intro period would go back up to something more normal. I think this based on the diff between the full amount at 15% compared to 0%….???
April 24th, 2009 at 5:24 pm
Greg,
I understand your skepticism, but the numbers really work out. I did a month by month breakdown to illustrate how much a person with $5,000 in debt would save with a 0% balance transfer compared with a person who doesn’t do a balance transfer in an article about using balance transfers to get out debt, which you view here. Once the 0% rate goes back up, the example I used of a person with 5k in debt with a 14% rate would have saved $588 on interest and reduced their debt 16% more than a person who didn’t do a balance transfer. After balance transfer fees, the savings were $438. So for a person with 10k on a card with 15%, the interest savings before fees would be in excess of $1200, and the total savings, once fees are accounted for, would be right around 1k.
I hope this clears things up for you and appreciate that you took the time to comment.
February 11th, 2010 at 1:32 pm
There is another angle that people aren’t seeing. After February 22, 2010 all additional payments made to your credit card will go to the highest interest first. While this initially sounds like a great idea, it is not for those with transfer balances on their account.
Let’s say I have balance transfer of $10,000 at a 5.9% for the life of my transfer. I also have $7000 balance transfer which is a 1.9% until October 2010. (After that it raises to 21%)
As of today, if I pay an additional 300.00 a month then it will go to my 1.9% interest. I have a chance of paying much of the $7000 balance before the rate goes up to 21%.
On February 22, 2010 any additional money paid will go to the highest amount owed. This will be the 5.9%.
I will NEVER be able to pay off the 1.9% transfer before it raises to 21%. I can never allocate any payments toward that transfer. That 1.9% doesn’t benefit me at all.
If you have any balance transfer added to a charge already on there, that balance transfer can never be paid by the time the rate increases. Your extra payment will go to the highest owed.
When my rate jumps to 21% the extra payment will go to that.
With this new law, I don’t see a low balance transfer as a benefit in any way.
February 11th, 2010 at 1:35 pm
Clare,
I’ll have to look further into this issue, as I am unclear about the payment allocation, though if you are correct, your particular situation is clearly problematic.
February 11th, 2010 at 3:05 pm
I took out a personal loan today to pay off my 1.9% before February 22. They will send the payment directly to the credit card company. I would have been in BIG trouble if I wouldn’t have done this.
I have the $10,000 balance at 5.9% until its paid off.
I have a new $7,000 credit union loan. I don’t have any other debt. (All of this was pre divorce house debt)
I think many people carry a balance and also have a balance transfer which will expire at some point. If anyone has the idea to pay off the balance transfer before the rate expires, it will be impossible.
I just got another offer in the mail to do a balance transfer at 2.9% until November 2011. There is a 3% fee and any payments above the minimum won’t touch it with the new law. Although my extra payments will go to it at 21%- that doesn’t help pay it off at 2.9%. The offer did NOT disclose the new law going into effect in February.
I’m in a good position right now. I just hate to see people fooled into thinking a balance transfer will be paid off before the time runs out. It won’t. You can only start working on paying it off when it’s at a high interest rate.
February 11th, 2010 at 3:09 pm
Citibank did confirm what I just posted. You can call for yourself. This is horrible.
February 11th, 2010 at 3:12 pm
One more post. Thank You.
“Fairer payment allocation
A close look at your card agreement will likely reveal a clause that explains that payments will be applied to lower-rate balances first. Not so anymore. The Credit CARD Act requires above-the-minimum payments to be applied first to the credit card balance with the highest interest rate.”
February 11th, 2010 at 3:14 pm
Clare,
Your mix of rates is unique, as most people aren’t fortunate enough to have fixed until paid off rates. For most people, the new laws will be positive, because their payments will reduce their highest interest balances first. Unfortunately, you seem to have been caught in the crosshairs, as your payments would reduce the long term balance transfer instead of the short term balance until the rate skyrockets.
Fortunately, you’re in solid financial shape and I hope you got fair terms from your credit union.
February 11th, 2010 at 3:16 pm
Ugh. Again, am very sorry to hear this. This is obviously advice that comes too late, but when your have a balance on a credit card and your company offers you a balance transfer, you may be better off going to another company. Only in the world of credit cards could a law designed to help consumers be used against them.