What is a balance transfer?

Credit card balance transfers explained

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Moving debt between credit cards can help you manage your finances without paying lots of interest.

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Balance transfer simply means moving existing debt from one credit card provider to another. People often use this tactic to reduce interest payments or help consolidate multiple debts into one manageable monthly sum.

It can be an effective way to manage credit card repayments, but there’s a lot that you need to consider about balance transfer credit cards before you make a decision on how to manage your debt.

How balance transfers work

Balance transfers work by literally shifting your debt from one credit card to another. A balance transfer credit card is the tool that you use to do this; the balance of your old card is paid off by your new card, effectively swapping who you have to repay.

If you have debt on a credit card at a typical interest rate of 18%, it could quickly become difficult to keep up the payments. If you were to move this balance to a 0% credit card, you wouldn’t pay interest until the deal expires, which could be up to three years.

In other words, if you pay off the card before the 0% deal expires, a balance transfer is a bit like an interest-free loan. 

Balance Transfer card

Watch out for fees

When you apply for a balance transfer credit card, you could potentially save hundreds of pounds on interest, especially if you move the debt from a high-interest card such as a store card. So why do banks promote these cards?

Banks and other providers of balance transfer cards make money in two ways. Firstly, if the cardholder doesn’t clear their debt before the end of the 0% period then they must start paying interest. Secondly, cardholders often have to pay a fee for this service.

A balance transfer fee charges you a percentage of the amount of the debt that you transfer. The typical fee is around 3%, with a minimum of about £3. If you transferred a debt of £1,200, then 3% of this would mean you would pay a £36 fee. Some cards charge lower fees, but often have a shorter 0% period.

Most credit card providers insist that you transfer 90-95% of the credit limit on your card. This is because providers don’t want you to have debts with other cards or spread yourself too thin and become unable to pay off the card.

You should factor any fee into your calculations, but don’t let it put you off as many people can still save money with a balance transfer credit card by not paying interest.

Alternatively, you could apply for a card that does not levy a fee but charges a low rate of interest for as long as it takes to clear the debt. But of course, if you want one of the top balance transfer deals, you’ll need to have a clean credit record and a good credit score.

Our credit card calculator can help you work out how long it will take to pay off an existing balance based on your current monthly repayments and APR.

Checklist for transferring a balance

1.       Decide how long you need to pay off your credit card. You can work this out by dividing your balance by the amount you can afford repay each month. For example, if you have a £2,000 debt and can afford £100 per month, it would take 20 months to repay.

2.       Use our comparison tool to find the best deal for you. Look for cards with a 0% balance transfer period that is long enough for you to repay the balance in full.

3.       Check if the balance transfer card comes with a large fee. This will be charged as a percentage of the amount you transfer (though some cards do have no fee).

4.       Choose the card with the cheapest fee that offers a 0% transfer fee long enough to pay back the whole balance - and do not use the card for purchasing anything.

Things to watch out for

Different rates for purchases: Try to avoid spending on a balance transfer card as you do not always pay the same rate for purchases as for the transfer itself.

For example, a balance transfer card might charge zero interest for 24 months on balance transfers but a standard rate of 18% on purchases. Or it might charge 0% on purchases, but only for six months.

Use different card companies: It’s worth noting that you are usually unable to switch balance from one card to another in the same banking group. For example, if you already have debt on a NatWest card, then you can’t transfer the balance to an RBS deal, as both banks are part of the same company.

You’ll need a clean credit history: If you want one of the top balance transfer deals then you need to have an excellent credit score. 

Make sure you check your credit score and see our tips on how to improve your credit score.  

Don’t look desperate: If you apply for too many credit cards or constantly switch from one card to another, it will show up on your credit record and could negatively affect your score. 

One way to prevent too many searches being recorded on your credit record is to use a tool to check your potential eligibility before actually applying. Our Smart Search won’t leave a footprint on your credit record but will show you the credit cards that are most suitable for you.

It can also provide ‘pre-approval’ on certain balance transfer cards. This means you are highly likely to be accepted for the card you applied for, providing you pass additional identity and fraud checks.

Play by the rules: Once you’ve been accepted and you’ve received your card, you will usually have to switch any debts within 60 days. Check the terms and conditions as failure to play by the rules could mean that you don’t get the offer that you initially signed up for.

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