Interest Free Balance Transfers
Interest free balance transfers are the holy grail of all free balance transfer offers. An interest-free balance transfer offer allows someone to transfer high-interest debt to a 0% interest credit card, or transfer funds directly to their bank account for a 0-interest, short-term loan. (Side Article: What is a balance transfer?)
What You Need to Know
While an interest-free balance transfer will not accrue monthly interest, that doesn’t mean it is entirely fee free. In fact, there is one major fee that many people ignore when they go to transfer a balance to an interest free credit card: the balance transfer fee.
Balance transfer fees are not interest; they are flat-rate charges that banks assess on accounts for making use of balance transfer offer. This fee is commonly 3%, but after the Credit Card Reform Act of 2009, credit card companies are increasingly reliant on new fees to cover the cost of offering interest-free balance transfers. Thus, most cards now charge a whopping 5% of the transferred balance to relocate the balance from the original card to the current account.
Introductory Free Balance Transfers
Introductory interest-free balance transfers are awesome, but you’ll have to pay attention to the fine print in order to get a good deal. Interest-free balance transfers should be evaluated by the length of the introductory term as well as the balance transfer fee.
As an example, we’ll use two different offers:
- American Express credit card with interest-free balance transfers for one year and a balance transfer fee of 5% or $5, whichever is greater.
- Discover credit card with an interest-free balance transfer for six months and a balance transfer fee of 3% or $5, whichever is greater.
We’re looking to transfer as much as $2,500 to the new card in the first year.
The American Express credit card would charge 5% of $2,500, or $125 to transfer the full balance of the card to American Express for one-year (12 months) for a total balance of $2,625. In order to avoid paying interest, the full balance will have to be paid off in six months. Total cost: $125
The Discover credit card would charge 3% of the $2,500, or $75 to transfer the full balance to Discover for a half-year (6 months), for a total balance of $2,575. In order to avoid paying interest, the full balance will have to be paid off in six months. Total cost: $75
Comparing the Two BT Offers
Amex Pros: The interest-free a balance transfer costs only $125 to borrow $2,500 for one-year for an effective annual interest rate of 5%. Plus, the card can be paid off over 12 months, requiring a payment of only $218.75 per month ($2625/12months) to pay the card off completely without interest charges.
Amex Cons: The cost ($125) is $50 higher than the Discover card.
Discover Pros: The interest-free transfer costs only $75 for a $2,500, six-month loan for an effective rate of 6%. The card can be paid off in six months if the borrower commit to making monthly payments of $429.16 per month ($2575/6 months). The balance transfer fee is $50 lower than the American Express offer.
Discover Cons: The borrower has only six-months to pay the card off before accruing interest on the debt.