Do Balance Transfers Accrue Interest?

September 25, 2019
Do Balance Transfers Accrue Interest?

One of the biggest draws of a balance transfer is the fact it doesn’t accrue interest, assuming the APR is set to 0%, which it often is.

With a 0% interest rate, any balance associated won’t be charged any finance charges during the promotional period.

This means the cardholder’s credit card balance does not grow, and every dollar of every payment goes toward the outstanding balance, as opposed to interest.

When Balance Transfers Accrue Interest

  • If your balance transfer APR is above 0% you’ll be charged interest
  • Take the time to shop around to find a 0% offer if at all possible
  • Some life of the balance offers come with APRs closer to 5%
  • Which while subject to finance charges, still beats the 20-30% APR seen on many credit cards these days

However, there are exceptions to this rule, and plenty of times when interest does indeed accrue.

After all, not all balance transfers come with 0% APR. Many come with APRs much higher, and as such should be avoided.

For example, I logged on to my Bank of America dashboard and saw a balance transfer offer for 14.99% APR. Seriously?

It’s a stretch to even call that a balance transfer offer given the near-20% interest rate, but I suppose with some credit card rates nearing 30%, it could save someone money somewhere?

A more reasonable example is a balance transfer for the life of the balance, which tend to come with relatively low APRs, say 4.99%.

This is a much better deal than the one I highlighted above, since there’s a very good chance the interest rate will be lower than whatever you’re currently paying.

However, if you do take them up on the balance transfer offer, you’ll be subject to finance charges at a rate of 4.99% APR.

On a $5,000 balance, we’re talking about $21 in interest monthly, and $250 annually. Sure, the balance transfer accrues interest, but imagine the alternative.

Say the balance is subject to a rate of 29.99% APR, you’d be looking at roughly $125 in monthly finance charges and $1,500 yearly.

So the savings are sizable, even if the balance transfer APR isn’t an ideal 0%. However, you should always strive to find the 0% offer first to avoid any and all interest charges.

Does the Annual Fee Accrue Interest?

  • Watch out for balance transfer offers with annual fees
  • Unlike the balance transfer fee, annual fees are subject to standard APR
  • So if the standard/purchase APR is 19.99% or similar
  • You’ll be paying interest on the annual fee unless you make a payment large enough to cover the AF and your minimum payment

Now let’s talk about credit card fees and interest, since there are some potential gotchas here you need to watch out for.

First the good news. Any balance transfer fees associated with a balance transfer are subject to whatever the balance transfer APR is.

So in our proceeding example, if the fee were the industry standard 3%, the $150 would be subject to the 4.99% APR.

Better yet, if you took advantage of a 0% APR credit card balance transfer, the balance transfer fee would also receive 0% APR for the promotional period.

Now let’s discuss a situation where a fee could accrue interest. If the balance transfer credit card you have imposes an annual fee, it can be subject to interest.

For example, say you receive a balance transfer check in the mail that offers 0% APR for 15 months with a 3% transfer fee.

You need $5,000 cash and want to take advantage of it, so you fill out the check and deposit it in your bank account.

The card had a zero-balance prior, which is recommended to avoid commingling balance transfers and existing purchases, leaving you with a new balance of $5,150.

A month later, an annual fee of $99 hits the account. All of a sudden, you’ve got a charge that is accruing interest every single day at the standard APR or purchase APR.

And guess what. If your account has balances with different APRs, your card issuer will allocate the amount of your payment that is equal to the total minimum payment due to the lowest APR balances first.

So, if the minimum payment is $50, and you make a $50 payment, it’ll go to the 0% APR balance. Meanwhile, the $99 annual fee will accrue interest. Not cool, right?

Well, here’s how you solve this problem. Any payment amount made in excess of your total minimum payment due should be applied to any balances with higher APRs before those with lower APRs.

In other words, if you make a payment of $149, the annual fee should be extinguished, leaving behind only the remaining balance transfer amount and balance transfer fee, which is subject to 0% APR.

Simply put, you need to make the minimum payment plus an additional amount to cover annual fee to avoid interest.

You’ll probably be charged for a day or two of interest on that $99 fee between the time it hits your account and the payment posts, but it likely won’t be anything substantial.

If you don’t realize this or forget to pay it off, you could wind up paying a pretty penny.

In summary, once the annual fee POSTS to the account, make a payment to cover it as soon as possible, as interest accrues immediately on it.

Alternatively, call up your credit card issuer and ask them to waive the annual fee. It’s worth a shot, as the worst they can do is say no.

But whatever you do, do it quickly.

Read more: Balance Transfer Pitfalls to Be Aware Of

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