Balance transfer credit cards: how do these work?
In many ways, a balance transfer is almost like an interest-free loan. You choose to move credit card debt you already have to another card, one that has a much lower rate of interest, or that has a set period of 0% interest promotional offer - some now have interest-free deals that last up to 40 months.
A balance transfer card with a reasonable 0% interest offer is often an attractive option for many people who have built up a significant credit card debt. In many cases it could be after a 0% purchase deal has ended which has now moved on to a high rate of monthly interest, typically around 18%. With a balance transfer deal they can shift that debt and potentially give themselves a longer period of time to pay it off.
Some key things to remember
- If you transfer a balance, normally you have to pay a fee to your new credit card provider. It usually amounts to between 2% to 3% of the total amount you transfer, although it can vary, and in most cases it is added on top of your existing balance. Usually you can’t transfer from one card to another that is within the same parent group – eg: Virgin and MBNA. You may have got a letter from your bank, or current or former credit card provider offering a balance transfer, or you may be searching online for the right deal.
- Pay at least the minimum amount required by the due date stated on your monthly bill. If you don’t, you run the risk of forfeiting any 0% deal and reverting to a standard interest rate. Setting up a direct debit for a fixed percentage, the minimum payment or above can help make sure you don’t forget, and paying more than the minimum can of course help you to clear the debt quicker – a minimum payment of £45 over 12 months won’t help you fully clear a debt of £1,000, for example. If you clear the debt completely by the time the 0% promotional offer ends, you will not have to pay any interest on the amount transferred.
- If you can, try to avoid using a balance transfer card to make a purchase. 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 be increasing the debt you’re trying to pay off.
- Making too many credit applications in a short space of time could affect your credit score. Even if you see it as just shopping around, it can have a negative impact on your Experian Credit Score. When you apply for credit, a ‘credit search’ is recorded on your report. You may have heard of the expression ‘card tarts’ – this refers to someone who regularly switches cards, in order to transfer large credit debt to another card with a promotional rate. Numerous credit applications can suggest you are over-reliant on credit to supplement your income, so try not to make more than one application in a three month period – more may negatively impact the way a lender views you.
So applying for a card that you know you’ve got a great chance of being accepted for – and that completely meets your specific needs - can mean that you don’t need to make too many applications, which in turn can help protect your credit score.