Whether you're a balance transfer newbie or a seasoned pro, transferring a balance to a new card can be a minefield. We answer all your need-to-know questions here so you can make your balance transfer a debt clearing success.
It’s easy to see why so many people see balance transfer cards as the Holy Grail of the credit card world. They allow you to move existing debt to a lower rate or even make it interest-free, so that you can pay it off more easily.
Rather than charging you heavily as some other credit cards can, these cards seem to offer a helping hand – simply transfer an existing balance to a 0% or low-rate credit card and you’ll start paying less interest on your debt immediately.
Of course credit card companies don’t offer these cards out of the kindness of their hearts; they hope that once you have transferred your debt to them you’ll trip at the first hurdle - by spending on your new card for example - and begin to rack up lots of interest.
So, you need to be well-informed before you can make balance transfer cards work for you.
Q: What is a balance transfer?
A: A balance transfer means moving an existing balance from a credit card or current account onto a new credit card. For example you might have an outstanding balance of £600 on a credit card which is charging you an uncompetitive rate of interest.
By transferring that balance onto a new card (effectively paying off one card with a second card) you can cut the amount of interest accruing on your balance with either an interest free or low rate deal, allowing you to pay it off more quickly.
However, you should remember that transferring your balance won’t make that balance smaller or mean you pay less per month. It simply means more of your repayments will go towards clearing your actual balance rather than paying interest, meaning you’re in a position to pay off your balance sooner.
Q: What kind of debts can you transfer to a balance transfer card?
A: Most people use balance transfer credit cards to pay off a balance they have on another credit card. Often, however, this debt will have to be on a card owned by a different company to the one you are applying for, as many credit card providers won’t take on debt you already have with them elsewhere.
Some balance transfer cards will also let you transfer funds to your current account, so that you can pay off an overdraft balance that's building up interest. You'll move the borrowing onto your new card so that you can then focus on paying it off at a lower rate.
Q: Is it better to move debt to a lifetime or 0% balance transfer card?
A: When making a decision between a card that’s interest-free but only for a limited time, and a card with a rate that stays low until you’ve cleared the balance, you’ll need to take several things into account. Either option may be more suitable depending on how much debt you have outstanding that you wish to transfer, how much you can afford to pay off each month, how long you think it will take you to clear the transferred debt, and whether or not you’re willing to switch deals again later on.
For example if you have a large balance or are unlikely to remember to transfer again in a few months’ time, a lifetime balance transfer card is likely to be more suitable. On the other hand if you have debt you anticipate being able to pay off in the short term, or if you’re happy to switch to a new card in a few months’ time, a 0% interest option could be the way to go.
Remember though that if you do have a larger balance to clear you’ll need to weigh up the cost you’d incur in handling fees with each new balance transfer against what you would pay in interest with a lifetime balance transfer card.
Q: What happens if you don’t pay off a balance on a 0% card before the end of the 0% period?
A: When you transfer debt to a 0% balance transfer card, the aim will be to obliterate that debt before the 0% offer comes to an end (often from 6-16 months, depending on the card). This is because when the 0% introductory period comes to an end your balance will automatically start to attract interest at the card’s standard rate, which could be upwards of 15-20%.
If you don’t manage to pay off your card in time, don’t despair – you should be able to move your remaining balance to another card, thereby enjoying another period of 0% interest on your balance. Remember though that this will incur another handling fee. You should start looking for new 0% offers about six weeks before the end of your 0% period if you anticipate not being able to pay it off in time.
Q: How do I transfer a balance?
A: When you first apply for your chosen card, you’ll be asked if you intend to use the card for a balance transfer. You should make it clear that you do. In the period of paperwork and credit checks that will follow, you will either be able to fill in a form setting out your balance transfer or you can do this over the phone. Have the details of your existing debt to hand, such as your credit card number, bank account sort code, and so on.
The balance transfer may take a few days to be completed, but you’ll then see your new balance as a minus amount on your new credit card(and £0 on your old credit card provided you've moved the whole lot) – at which point you can start work on paying it off straight away.
Q: How much of my balance should I pay off each month?
A: Once your balance has been transferred to your new card you will be sent monthly bills which will require you to pay a minimum amount towards clearing your credit card balance. However this minimum amount can often be so minimal that it would take you years to clear your balance if you only ever paid that much.
As such it’s a good idea to aim to pay as much as you can of your credit card balance each month, rather than simply meeting the minimum payment required. Of course that doesn’t mean dedicating all your disposable income to paying off your debt, which is why you should draw up a budget according to how long your 0% period lasts, or according to how much debt you have to pay off if you’re getting a lifetime balance transfer card.
If opting for a 0% card divide the amount you have to clear by the number of months the 0% period lasts. This will give you the minimum amount you’ll need to meet each month to make sure the debt is cleared by the time the 0% period ends. If getting a lifetime card, a better approach will be drawing up a budget of all your expenses and seeing how much you can afford each month to put towards your credit card bill – just try to make it more than the minimum required payment.
Q: Can I spend on a balance transfer card?
A: The answer to this is yes, and your credit card provider will encourage you to use your new card for purchases as much as possible – but in most cases you should avoid spending on a balance transfer card at all costs. It may even be worth going to the extreme of cutting your card in half as soon as you receive it, so you won’t be tempted to hit the shops with your new plastic.
This is because purchases made on a balance transfer card will not be classed as part of the low-rate or 0% offer applied to your transferred balance, and will go straight to the back of your payment queue. This means that any payments you make to clear your balance will go towards your transferred balance first, and will only go to purchases once your entire transferred balance has been cleared.
As such if you transferred £1,000 onto your new card and then went on a shopping spree and spent £150 on your card, that £150 would sit at the back of the queue accruing interest at the card’s standard rate until you had cleared your entire £1,000 transferred balance.
Q: How much does it cost to do a balance transfer?
A: The main cost of transferring a balance is the ‘handling fee’ charged by the credit card company. This is the up-front cost you will be charged for moving your balance to your new card. It’s usually expressed as a percentage of however much you transfer; for example, if you wanted to transfer £750 to a new card that had a 2.98% handling fee, you would be charged £22.35 for doing so.
This £22.35 would be added to your overall credit card balance to be paid off with the rest you have transferred. Often a 0% balance transfer card will incur a higher handling fee, while lifetime balance transfer cards often come with no fees at all or a minimal fee – because you’ll be paying interest to your provider (though at a low rate).
Q: What if I’m given a credit limit that’s too low?
A: If you’re looking to transfer a balance of £3,500 but you’re given £2,500 as your limit on your new credit card, it might be tempting to turn the card down and look elsewhere. However this is best avoided because every time you apply for a credit card a mark will be left on your credit rating, which can be detrimental if you are applying for one or more credit cards within a short period of time.
There’s no harm in politely asking your credit card provider if they might consider extending your credit limit. If that isn’t possible, accept the limit you are given and simply transfer that amount of debt over to your new card. This way, although not all of your outstanding debt is enjoying a 0% or low rate, at least part of it is which means you can work on paring that down more quickly.
Q: What effect will switching from card to card have on my credit rating?
A: Generally as long as you aren’t applying for lots of different credit cards at the same time or applying for more than one in a short space of time, switching from balance transfer deal to balance transfer deal won’t have a detrimental effect on your credit rating.
As long as you spread out applications for new credit cards your credit rating won’t be damaged – so, applying for a new card each time a 6-12 month 0% offer has ended isn’t going to leave too much of a mark on your record.
