Balance transfer credit card fees explained

We clear up the confusion around balance transfer credit card fees.

Fee confusion

Balance transfer credit cards are a popular way to tackle outstanding credit card debt.

But the transfer fees you pay when you use the card may not be quite as clear as they should be, according to Which?

The consumer champion surveyed borrowers, asking them to see how much a balance transfer would cost them. Just 4% got it right. Somewhat worryingly 68% thought the transfer would be free, even though a transfer fee was made clear to them.

There was also confusion when trying to pick out which card would work out cheapest, with a third of borrowers plumping for the card with the lowest APR but ignoring the transfer fee.

So just how do balance transfer cards work? And how can you work out what it will cost you?

Who should use a balance transfer credit card?

If you have outstanding debt on a credit card, then every month you will be charged interest on that balance.

As a result, clearing the debt will take longer, and cost you more.

Let’s take an example. You have £1,000 on a credit card, with an APR of 18.9%. Each month you pay off £50. It will take you two years to clear that debt, and you will end up shelling out £190 in interest.

Now let’s say that you find a balance transfer credit card with a 20-month 0% period. That means that you wouldn’t pay interest on your balance for 20 months. Sticking to your £50 a month repayment, the debt would be clear by the time the 0% deal ends, and you won’t pay a penny in interest.

So you’ve cleared your debt four months quicker, and you have saved the best part of £200 in interest charges!

Where does the transfer fee come in?

The vast majority of balance transfer credit cards don’t offer this service entirely free. Instead, you will have to pay a balance transfer fee. This is a very small percentage of the balance that you are moving onto the new card, typically around 3%.

So in our example above, if the card boasts a 3% transfer fee, our borrower would pay a fee of just £3 in order to benefit from 20 months of 0% interest.

Generally, the longer the 0% period on offer, the larger the transfer fee will be. That said, there are now a number of cards that offer lengthy interest-free periods but charge fees of less than 1%, and in some cases no fee at all.

How do I work out which card is right for me?

Clearly, if the Which? study is anything to go by, picking out the right balance transfer credit card can be a little tricky. So how do you go about working out which card to apply for?

Firstly, calculate exactly how much you owe, and how much you can afford to pay each month towards clearing that debt. Be realistic and make sure you don't leave yourself struggling because you have overestimated. From there, you should be able to work out what sort of 0% period you need.

For example, if you owe £2,000 and can afford to pay off £90 a month, you’ll need a card which offers at least 23 months of 0% interest in order to clear the balance in time.

Once you have that figure, take a look at the credit card comparison centre on loveMONEY. You’ll be able to compare all of the top 0% balance transfer credit cards on the market today, with any transfer fees clearly signposted.

Generally, you should then go for the card with the lowest transfer fee. It’s important to remember that that’s not always possible – for example you can’t transfer debt between two cards from the same provider.

What about the APR?

With a 0% credit card, the representative APR will likely not be a big factor in the card that you go for. This figure is the interest rate you will be charged AFTER your 0% period comes to an end. But the idea is to clear the balance before that happens. So long as you are within your 0% period, the APR figure doesn’t really make much difference, whether it’s 18.9% or 25%.

However, if you come to the end of your 0% period and you still haven’t cleared your balance, the APR will become far more important. At this point it’s a good idea to shop around for another 0% balance transfer card, or even a low APR card.

And don’t forget the annual fee

There is one more potential fee to bear in mind – an annual fee. Thankfully they are incredibly rare on balance transfer cards, but as the name suggests, this is a fee that you have to pay each year for your card.

If your credit card does happen to charge one – and right now the Santander 123 credit card is the only notable card with a decent 0% period that does – remember to include that fee when working out which card to go for.

Where can I find the best 0% balance transfer credit cards?

Here at loveMONEY we have two regularly updated best buy articles looking at the best balance transfer credit cards: The best 0% balance transfer credit cards and The best low-fee 0% balance transfer credit cards.

And for a look at the whole of the market, be sure to make use of our 0% balance transfer comparison centre.