How do balance transfers work?

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If you have credit debt, which means you carry a balance on your credit card(s) rather than paying it off in full every month, you might benefit from a balance transfer. But how exactly do balance transfers work? And how can they save you money? This article will tell you everything you need to know.

What is a balance transfer?

A balance transfer is a financial tool that allows you to transfer the balance of one or more credit cards to another card. The main reason for carrying out a balance transfer is that such deals usually come with low or even 0% introductory interest rates.

So, for example, if you owe £1,000 on an existing credit card with an interest rate of 19%, you could transfer this £1,000 balance to a balance transfer card that offers a 0% interest rate for a specified period.

You would then have a set period of time to focus on paying off the £1,000 balance without incurring any additional interest charges.

Needless to say, this makes a balance transfer a useful tool when paying off credit card debt.

How do balance transfers work?

It’s quite simple.

Let’s say you have a credit card – we’ll call it ‘card A’ – with an outstanding balance of £1,000. You are, however, short on cash right now and would like to have more time to pay off your balance without accruing additional interest.

In such a case, you can apply for a balance transfer card – that we’ll call ‘card B’ – with a low or a 0% interest period.

As part of your application for card B, you will have the chance to provide information and details on the balance you would like to transfer. If you are approved, the provider of card B will take care of the transfer from card A.

Alternatively, you can get card B first, then apply for the balance transfer from card A later either online or over the phone. Make sure you have the relevant details to hand, such as the card number of card A, the card provider, and the balance amount (in this case, £1,000).

However, it’s important to note that balance transfer cards will give you a limited window of opportunity in which to transfer your balance. This will be a period ranging from 60 to 90 days. You must transfer the balance within this window in order to qualify for the interest-free period.

What fees and charges are there for balance transfers?

You will typically have to pay a balance transfer fee to the provider of the balance transfer card when you move your balance.

This fee is usually 1%-3% of the amount transferred, though minimum and maximum fee amounts apply. This fee will be added to the balance.

What are the advantages and disadvantages of a balance transfer?

There are both positives and negatives to balance transfers. Let’s break them down.

Advantages

  • Save on interest: You can transfer your outstanding balance from a higher-interest credit card to a balance transfer card with a 0% promotional period. If you pay off your debt during this promotional period, you will pay zero interest.
  • Consolidate debt: Balance transfers allow you to consolidate all of your debts into one place. This can remove the hassle of making payments towards multiple cards. You will now only have one credit payment to make each month.
  • Potential to get better features and perks: If your current credit card provides few perks and rewards, you may be able to get more from a new balance transfer card.

Disadvantages

  • Balance transfer fee: While a balance transfer fee may be worthwhile, especially if you will save more in interest by transferring your balance, these fees can quickly add up if you develop a habit of putting off clearing your balances and carrying out one balance transfer after another.
  • A good to excellent credit score is required: You typically need to have a great credit score to qualify for a balance transfer credit card. This is also true if you want to qualify for a lower regular APR.
  • Risk of more debt: Opening a new credit card means that you have more credit available to you. If you are not careful with your spending, you could easily find yourself in more debt.

Can you transfer balances from more than one card?

It is possible to transfer more than one balance to a single balance transfer card as long as you stay within the limit of the new card. However, you will not be permitted to transfer balances between cards from the same provider or the same financial group.

So, if you have a balance on a First Direct credit card, you would not be able to transfer this to an HSBC balance transfer card. This is because First Direct and HSBC belong to the same banking group.

If you have a balance on more than one card, check with the providers of each to find out which banking groups they belong to before applying for a balance transfer card.

Can a balance transfer affect your credit score?

In a word, yes.

Opening a new credit card could increase your overall available credit. As long as you don’t take on more debt, this can bring down your credit utilisation ratio and help boost your credit score.

That being said, a balance transfer can also hurt your credit score. This can happen in two ways:

  1. Transferring your balance to a card with a lower credit limit than your current one and closing your existing card after the transfer may increase your credit utilisation ratio, resulting in a drop in your credit score.
  2. Getting a balance transfer card and closing an older one may also reduce the average age of your credit accounts. This could negatively affect your credit score.

When is the best time to do a balance transfer?

There is no one best time to carry out a balance transfer, it really comes down to personal circumstances and needs.

If you have outstanding credit card debt that you are struggling to pay off, perhaps due to a high interest rate, or if you simply need more breathing room to pay off your current debt without incurring additional interest, then it’s always a good time to consider a balance transfer.

What is a 0% interest balance transfer?

With 0% interest balance transfer cards, there are no interest charges on your transferred balance until the promotional period ends. Usually, you will need a good to excellent credit score to qualify for this type of card.

If you do not qualify for a 0% balance transfer credit card, the good news is that you can still qualify for a lower interest rate during the promotional period, which can allow you to save money on your existing debt.

Check out our balance transfer calculator to find out how much you could save by switching to a balance transfer credit card.

Keep in mind, however, that once the promotional period expires, you will be charged the regular rate on any outstanding balance.

Which balance transfer card should you choose?

When deciding which balance transfer card to choose, you need to think about your circumstances and be realistic. If you are committed to paying off your credit card debts, it’s a good idea to put together a plan of action.

You will need a budget to work out how much you can afford to pay each month once all of your essential expenses have been taken care of. This will give you an idea of the amount of time you will need to clear the balance. Once you have a realistic time frame, you can then look for a balance transfer card with an appropriate 0% interest-free period.

Working out the time you need to clear the balance will prevent you from selecting a balance transfer card with an unsuitable interest-free period.

By avoiding a card with a shorter period than you need, you won’t end up paying interest on the outstanding balance when the interest-free period ends. Alternatively, avoiding a card with an interest-free period that’s longer than you need could help you avoid having to pay a higher upfront fee.

Final thought

Take a look at our guide to 0% balance transfer cards in the UK to find the card that’s right for you.

It’s in your best interest to stick to your budget and pay off the balance on your balance transfer card. The interest-free period is a short- to medium-term solution. Channel the discipline you’ve used to organise your balance transfers into adopting good future spending habits.