09 May 2016

Understanding balance transfers

When you shift all or part of your card debt to another financial provider’s credit card, this is called a balance transfer. You can use balance transfers to take advantage of a lower interest rate (generally 0% for a fixed period) than the one you are currently paying.

Balance transfers are also a way of consolidating several higher-interest debts onto one card, with just one monthly payment. There is usually a balance transfer fee of up to 3% added to the total amount.

When should I consider a balance transfer?

There are a number of scenarios where you might consider transferring your credit card balance. For example, if you:

  • Are paying interest on your current card debt and want to switch to 0% while you pay it off

  • Have lots of debts on multiple credit and store cards – it’s easy to lose track of these and miss payment dates, so a single debt on one card with one monthly payment could be easier to manage

  • Are able to stick to a monthly budget and pay off the whole debt within the 0% period. So, you could transfer £1000 onto a 12-month 0% card with a 3% transfer fee, pay £86 a month and be clear of debt in a year – as long as you don’t spend anything else on the card

  • Have a good credit record. Your new provider will run credit checks and you may be refused if you have a poor one, so it’s worth checking before you apply. Some providers will provide a no-obligation quote that won't affect your credit rating.

What do I need to be aware of?

Although it’s possible to get 0% on a balance transfer for as long as 40 months, you’ll generally pay a higher balance transfer fee because of the longer term. If you think you can pay your debt in less time – 12 or 23 months for example, you could pay a lower fee or even no fee at all.

Avoid putting new purchases on your 0% credit card – you will generally be charged a higher rate of interest on the whole amount. With some credit cards however, your balance transfer sum is kept in a separate 0% ‘pot’ so only the new transactions are charged higher rate interest. If you clear all your new purchases by the due date then you won't pay any interest at all.

You could set up a Direct Debit from your current account to the credit card each month so you never miss a payment. If you miss a repayment, you may lose your 0% interest rate, although some providers may not remove the introductory offers even if a payment is missed, so it’s worth checking before taking out the card.

You can’t do a balance transfer within the same bank or banking group. If your debt is on a Barclaycard, you can’t take out a new 0% Barclaycard, or if you want to do a balance transfer from a First Direct credit card to a new HSBC one, you won’t be able to as they are in the same banking group.

Make sure you pay off the debt before the 0% period ends and your interest rate rises. If you can’t pay off the debt before the end of the period then another option is to complete another balance transfer to a different provider that is offering a 0% period. But don’t, forget you then may have to pay another balance transfer fee.

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Credit cards are available to those aged 18 or over (UK residents only), and are subject to circumstances and a minimum income of £5,000 per year.

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