Transferring a balance onto a zero or low rate card can go a long way to getting you debt free faster, but this comes at a cost. We look at just how much you'll have to pay to transfer your balance and how you can make sure you get the best deal.
When you have outstanding balances on your credit cards, a loan you’re struggling to pay off or perhaps an overdraft balance that just won’t go away, balance transfer cards can be the answer to your prayers.
They allow you to shift your debts onto a card with a low or zero interest rate, meaning you can work on paying them off more quickly because more of your repayments go towards your actual balance rather than the interest accruing on it.
However, transferring your balance to a balance transfer credit card is unfortunately rarely free of charge. You will generally be charged a ‘handling fee’ which acts as a payment from you to your new credit card provider for allowing you to transfer your balance to them.
How do handling fees work?
A handling fee is a charge for transferring your balance to a new balance transfer card. It is usually expressed as a percentage of however much you transfer; for example, if you were going to transfer a balance of £1,200, and the handling fee was 3%, you’d be charged £36. This £36 would be added to the total amount outstanding on your new balance transfer card.
Due to the fact that handling fees are expressed as a percentage of your balance, your handling fee will be more costly the more you transfer.
For example while a transferred balance of £127 with a 3% handling fee would generate a mere £3.81 charge, a transferred balance of £1,275 at 3% would incur £38.25. Of course, if you are transferring a balance as large as this you may well be happy to pay nearly £40 for the privilege.
It’s important to note that while nearly every balance transfer card offering a 0% deal will charge a handling fee, there are several lifetime balance transfer cards which will charge nothing – because they make the money back in the interest that will accrue on your balance.
You’ll generally find that you’ll be charged more for transferring to a 0% deal than to a lifetime deal, simply because 0% cards have less of a chance to make money back from you through interest.
Another thing to consider is that handling fees are sometimes more expensive the longer your interest-free period lasts, though this isn’t always the case.
You might find a card with an interest-free period of 10 months and a handling fee of 4%, while another card might have a 0% period of 3 months and a handing fee of 2%. However, this is sometimes subverted meaning you could in fact enjoy a 0% period for 10 months with only a 2% charge – this is why it’s worth looking into the small print of any card you’re interested in.
How much is my interest-free borrowing really going to cost?
Before you apply for a credit card you can do a quick calculation to find out exactly what it is going to cost to transfer to that card.
Take the amount you want to transfer, divide it by 100 then multiply it by the handling fee percentage.
What you’ll get is the actual amount you will have to pay for your transfer. Depending on how long the interest-free period is for, you can then decide whether or not it is worth paying this cost. For example:
Amount to transfer: £750
Handling fee: 3.2%
Interest-free duration: 9 months
Divide 750 by 100 (7.5) then multiply this by 3.2 and you get 24.
You’ll pay £24 for interest-free borrowing that will last 9 months – it’s up to you to decide whether you are happy paying that – if not, look for a card with a smaller handling fee that still has the amount of interest-free months you need.
What else should I consider?
While some handling fees are capped at around £50 regardless of how much you transfer, other card providers put no limit on the amount you could be charged when you transfer a balance. As such it’s crucial to check the small print on any card you’re transferring to, in order to find out exactly how much your interest-free borrowing will cost.
What’s more, it’s worth noting that while a handling fee may be advertised as 2.5%, this may only apply to balances transferred from credit cards. Balances transferred from current accounts (overdrafts) or loans may incur a higher percentage handling charge.
Some card providers have even been known to charge interest on your handling fee, meaning your interest-free borrowing is suddenly not so interest-free after all – because while your transferred balance may be enjoying 0% interest, your handling fee is totting up interest until you can pay it off. Be sure to check small print of any card’s terms and conditions and call the card provider if you aren’t sure.
Finally, it's worth noting that if 2 cards offer interest free periods of the same length but one has a higher handling fee than the other, providing you're happy with the rest of the card's ts and cs, you should go for the card that charges less so that more of your money can go towards paying off the balance you transfer.
It's also important not to be swayed by a lengthily balance transfer offer if you don't need it.
Work out how much you'll be able to repay a month, then how many months it will take you to clear the balance you plan to transfer completely. Then, simply opt for the card that offers enough interest free months for you to pay off your debt and has the lowest handling fee. This way you can be confident that you haven't paid out more than you need to for your balance transfer.
