Even with a fee, 0% balance transfer deals can offer savings

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
My new credit card offers 0 percent APR for the first year. However, for balance transfers to my new card they charge a 3 percent transaction fee. BofA tells me the transfer fee does not affect APR. I don't see how they can charge me a fee, and then tell me the APR is still 0 percent. – Jeff


Dear Jeff,
First, what you have is an excellent balance transfer arrangement. The credit card issuer – in this case Bank of America – has offered to take on an existing debt that you racked up with a different creditor. As long as you abide by the bank’s agreement, for one year it will neither assess nor add any interest charges to the balance that you moved over. Such a deal!

Most balance transfer cards come with a one-time fee, however, which is based on a percentage of the balance moved over to the new card. Whatever debt you want to move to the new card, the balance transfer fee will be added to that.

Yes, there is generally a fee involved in balance transfer deals, but it typically is minimal, and the savings you can experience can be very worthwhile.

Here is an example of how this all works. If Bank of America took over a $5,000 debt, the transfer fee would be $150, since it’s 3 percent of the balance. Therefore, you now owe $5,150. All you have to do at this stage is pay the debt off within 12 months and no interest will be charged. The easiest way is to calculate a fixed monthly payment that will guarantee a zero balance in one year.

So, using the $5,150 example again, you’d need to send at least $430 every month. Have it automatically deducted from your bank account and keep tabs on your progress. If you can’t manage such high payments, you’ll end up with a balance remaining on the account, which will be subject to the card’s regular APR.

The great news is that balance transfers can save you a significant chunk of change. If your old account came with a 21 percent APR and you owed $5,000, you would have to pay $466 a month with total interest charges of $587 if you deleted it in a year.

To ensure you enjoy all the benefits of the balance transfer, make sure you follow the rules:

  1. Don’t charge with the new card until the debt is repaid. The 0 percent APR is only for the transferred debt. Interest will be charged on other translations.
  2. Pay before the due date. Delinquent payments may result in a premature rate hike.
  3. Use the old credit card as a payment tool. It’s easy to see the account with open line of credit on it as an invitation to spend more than you can afford. Resist. If you give in, you’ll have debt on both cards. Go ahead and charge, but pay your bill on time and in full.

Clearly you’ve asked a very important question, Jeff. This is the perfect time to gain clarity about the way credit cards work regarding interest and fees so you can sidestep avoidable mistakes.  Plus, if you’re dedicated to timely payments and quick debt deletion, your credit rating will increase. That will put you in line for premium loans and credit lines in the future!

See related: What is a balance transfer? 9 things you need to know, Balance transfer calculator

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Updated: 11-19-2018