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What is a balance transfer?

Written by Sebastian Anthony

What is a credit card balance transfer?

A balance transfer is the moving of debt (the balance) from one credit card to another; you are essentially paying off one credit card with another. Most balance transfer credit cards offer 0% interest on transferred balances for a long period of time – up to 36 months – which can save you a lot of money if you’re currently paying double-digit interest on another credit card.

By moving your debt from a high APR credit card to a 0% balance transfer card, you can either reduce your monthly repayments to zero for a period of time – or you can pay off the debt more easily, because your repayments aren’t being swallowed up by interest charges.

You can also transfer multiple credit card balances to a single 0% balance transfer card, which can simplify your financial planning significantly.

Should you use a balance transfer?

Balance transfer cards are typically designed for people with a good-to-excellent credit rating. You may not qualify for such a card if your credit isn’t in tip-top shape.

Balance transfers are ideal if you’re struggling to pay off the principal balance on one or more credit cards due to high monthly interest payments. By consolidating your credit cards into one single balance transfer card, you can make one lower monthly credit card payment.

Even if you only have a small amount of credit card debt that you’re paying interest on, if you have a good credit rating it’s probably worth shifting the debt onto a 0% balance transfer card.

How do balance transfers work?

Most balance transfers are executed shortly after you’re accepted for a new 0% balance transfer credit card. Your new card issuer will ask you – via a website or over the phone – for the details of the balances that you want to transfer.

You don’t always have to open a new balance transfer card to transfer a balance, though. Some credit cards will periodically allow you to transfer a balance from another card at 0% interest – but usually for a shorter period (12 months) than if you’d applied for a new card. Again, you will usually use the card issuer’s website or a phone call to perform the balance transfer.

Balance transfer fees

While most balance transfer cards offer 0% interest for a long period of time, balance transfers aren’t completely free: you need to pay a one-off fee, which is usually a percentage (between 2 and 5%) of the amount being transferred. The fee can normally be added to your new balance, so you don’t have to pay it immediately.

Minimum monthly repayments

Another thing to bear in mind with balance transfer cards is that you must pay at least the minimum monthly repayment. Again, this is usually a percentage (around 1%) of your total balance.

If you ever fail to make your monthly repayment on time, you’ll immediately lose your 0% interest deal and be moved to a double-digit APR – usually around 20%. Any other perks, such as cashback and rewards, will probably be removed from your account as well.

The best way to avoid such a scenario is to set up a direct debit to pay the monthly minimum – and then make sure you always have enough money in your current account to pay it.

Balance transfer tips and tricks

The 0% interest rate might encourage you to spend more money than you usually would – but it goes without saying that you will have to eventually pay off the balance, so be careful not to rack up too much debt. Before you apply for a balance transfer card, it’s wise to calculate whether you’ll be able to pay off the balance before the promotional period ends – and then to set up a direct debit to make sure that you do actually pay it off.

As with all credit cards, always pay at least the monthly minimum repayment, and don’t go over your credit limit.

Some balance transfer cards also offer cashback, loyalty points, and other rewards on purchases – but be warned that it usually isn’t a good idea to purchase stuff on a balance transfer card. The 0% period on purchases is usually shorter (from 3 to 12 months), so you’ll have to settle that debt quite quickly. A better idea is to get a dedicated 0% purchase card.

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