It is quite common now to move credit card debt to another card to help give yourself more time to pay it off at a cheaper rate.
A balance transfer is when you choose to move your credit card debt to another card with a lower or 0% interest rate.
How do they work?
With a 0% balance transfer credit card you can potentially give yourself longer to pay off an existing credit card debt, without having to pay interest. Some 0% rates last for 3 months, some for up to 24 months, one or two even longer.
It can work almost like an interest-free loan, but only if you make sure you plan well and pay it back within the period of the 0% promotional rate, and as long as you make the minimum monthly payment, and stick to any other terms and conditions the card might have. If you don’t make the minimum monthly payment, or you miss the pay date entirely, you run the risk of losing the promotional 0% deal as well.
When might someone choose a balance transfer credit card?
It varies from person to person, but in many cases people decide to move debt to a balance transfer credit card after a 0% purchase deal ended with a significant balance still left on the card, this moving on to a high rate of monthly interest, typically around 18%. Understandably perhaps, they’d rather find a way of not having to pay such a high interest rate on the remaining balance.
It could also be because they used their credit card to fund a large purchase such as a car, a holiday or home improvement, and they would like to have more time to pay it off at their own pace. Finally, it could be a method of consolidating a number of debts into one package that could make it potentially easier to manage paying it all off.
What you have to remember about them
Fees – Typically you have to pay a transfer fee, which is usually a percentage of the amount you’ve moved over. Rather than being charged straight away as a lump sum, it’s usually added to the total debt.
So for example if you’ve transferred a credit card balance of £2000 and the new card comes with a 3% transfer charge, then there would be a fee of £60 and so the opening balance would be £2060.
One other thing – usually you can’t transfer from one card to another that is within the same parent group, for example Virgin and MBNA, or RBS and NatWest.
Try not to spend – If you can, try to avoid using a balance transfer card to make a purchase – some people even hide it away once they’ve received it to avoid that temptation! It’s true that some balance transfer cards will have concurrent introductory purchase offers, but they are usually short-term and once they have ended they will move to a standard rate, which means if you did spend on it you’d probably be increasing the debt you’re trying to pay off.
Paying it off – Try to pay at least the minimum amount required when the monthly bill comes. Setting up a direct debit for either a fixed percentage or the minimum payment can help make sure you don’t forget, and paying more than the minimum can of course help you to clear the debt quicker.
For example, a minimum payment of £45 over 12 months won’t help you fully clear a debt of £1,000, for example. However, if you clear the debt completely by the time a 0% promotional offer ends, you won’t end up having to pay any interest on the amount you originally moved, other than the transfer fee.
How do I go about moving to a balance transfer credit card?
With any credit card, it’s best to first consider what you want a credit card for – is it building up a credit history? making a large purchase? Is your priority moving credit card debt to pay it off at a better rate? It’s worth considering your options and choosing one that best suits your needs.
Research your options – think about comparing the interest rates, the APR and other features. It’s best to fully understand the terms and conditions of use, and any promotional interest rate periods, before you start using your new credit card.
Don’t forget that repeatedly applying for credit could reduce your credit score. Now Experian can help you find credit cards and personal loans you’re more likely to be accepted for, and it won’t negatively impact your credit rating.
Experian CreditMatcher is a free independent service that helps you compare credit deals, and gives you your Experian Credit Score FREE forever. We are a credit broker not a lender, working with selected lenders. †
With Experian CreditMatcher you can check your chances of being approved by viewing your Eligibility Rating for relevant 0% balance transfer cards. Remember though that if you are accepted, the interest rate or promotional deal you get from lenders may be different to the one advertised.
†Experian acts as a credit broker and not a lender in the provision of its credit cards and personal, car finance and guarantor loans matching services, meaning it will show you products offered by lenders and other brokers.
Experian acts independently and although CreditMatcher shows products for a range of lenders and other brokers it does not cover the whole of the market, meaning other products may be available to you. CreditMatcher services are provided free however we will receive commission payments from lenders or brokers we introduce you to.
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(originally posted April 2016, updated Dec 2016)