Q: I did a balance transfer to one of those 0 percent interest cards for a span of some months - but my first bill came and there was over $375 in some sort of fee. What gives?
Welcome to the new reality of credit card balance transfers. When zero percent transfer deals first gained popularity, banks used them as promotional weapons to snatch their competitors' most lucrative customers. Today, they're still an important part of most credit card deals, although consumers now pay a premium for the convenience of consolidating debt.
The $375 you paid is what's called a "balance transfer fee." Even though you're paying no finance charges for between 6 and 21 months, your new credit card issuer charged you an upfront fee of up to 5 percent of your transfer. Depending on your card's terms, you may even have to pay interest on that fee, along with any related minimum monthly payment.
- Upfront balance transfer fees reduce risk. The 2008 credit crunch forced banks to write new playbooks for scouting customers. Demographic research indicates that cardholders who can afford to lump an upfront transfer fee tend to pay more reliably than customers seeking to surf balances for free.
- Upfront balance transfer fees discourage "deadbeats." A PBS documentary crew once recorded a former banking industry executive confessing that he and some of his peers considered you a "deadbeat" if you paid your bill in full every month, thus making no profit for the bank. An upfront fee filters out less profitable customers who might otherwise be inclined to just pay off their balances instead of transferring them.
- Upfront balance transfer fees generate front-end revenues for your bank. Regardless of whether your credit card company thinks you're a deadbeat, they're still in the business of making money for shareholders. Now that they have become accepted practice, balance transfer fees generate nearly immediate cash flow for banks.
You can still find no-fee balance transfer offers, especially if you carry a high credit score and you look carefully:
- Seasonal recruitment offers. National credit card issuers often sit on fee-free balance transfer offers until they have to bolster their low-risk lending portfolio. That's when companies like Chase and Citi will drop transfer fees, usually on travel rewards cards and other credit cards for excellent credit.
- Credit unions and community banks. When your credit card issuer doesn't report to shareholders, they're typically more generous with fees and features. For instance, The PenFed Promise Card and the PenFed Defender American Express Card charge no balance transfer fees at any time. Pentagon Federal Credit Union also runs seasonal offers with discounted or waived balance transfer fees on its other cards.
Even though you're smarting at the thought of paying that $375 bill, you're probably still saving a significant amount of money compared to the finance charges you would have paid if you had kept your balance on its previous card. Keep an eye on the fine print when you make balance transfers in the future, and watch for fee-free deals throughout the year.