What is a balance transfer?

A balance transfer is the moving of debt (the balance owing on your card) 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 an existing 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 and make your debt easier to track.

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 good shape.

Balance transfers are valuable 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 and concentrate on just paying down the balance, rather than paying a combination of the balance plus interest.

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 you could save money by shifting the debt onto a 0% balance transfer card.

How does a balance transfer 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. Depending on the card issuer, this may also be asked as part of the application process for the credit card to make the transfer more efficient once approved.

How many times can you do a balance transfer?

You don’t always have to open a new balance transfer card to transfer a balance. 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. You may receive special offers by email or post from your card issuer for balance transfers from time to time – keep an eye out for offers.

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 an extended period of time, balance transfers usually 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. 

Keep this cost in mind when calculating how much you might save with a balance transfer.

Minimum monthly repayments

Another thing to remember 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 owing.

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. You are still responsible for the debt, regardless of which credit card it is on. 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. Remember that the balance you transfer onto your new card counts towards your new 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 items 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.

27 January 2021