Balance Transfer Credit Cards: How They Work and What to Know
Balance transfer credit cards allow you to shift your debt. This guide will show you how they work, what fees are associated, how long you can use them for free, and more.
A balance transfer credit card allows you to move existing credit card debt on to another card. In effect, the new card pays off the debt on an old one(s). Choose the right balance transfer credit card and you could cut the cost of your debt and be able to clear it quicker.
How do balance transfer credit cards work?
The best balance transfer credit cards typically will give you between two and three years to pay off your balance interest free. But as with most financial products, the balance transfer credit cards offering the best deals are usually reserved for customers with good credit scores.
When might it be good to get a balance transfer credit card?
The main reason to get a balance transfer card is to cut the cost of existing credit card debt. You should be able to take advantage of more favourable terms, such as a lower interest rate or a longer interest-free period. You may even be able to get both.
It may also be convenient to have all your card debt in one place, so there’s just one monthly payment to take care of. And if you’re coming to the end of a 0% interest period on your existing credit card or you’re already paying the standard interest rate, then now’s a great time to find out if a balance transfer credit card is a good fit for your finances.
Can I transfer someone else’s balance to my card?
There may be a time you wish to transfer someone’s else’s debt to your card to take advantage of a lower interest rate which they may not otherwise be able to access. This is often possible, and many card providers allow balances to be transferred between partners and dependants.
When you apply online, the new card provider generally doesn’t ask for the name of the account holder whose balance is being transferred.
But while transferring someone else’s balance to your card can greatly improve family finances, remember that in doing so you become responsible for their debt. So always think carefully about the consequences.
Are there disadvantages to balance transfer credit cards?
Balance transfer cards often come with a fee, usually called a ‘balance transfer or handling fee’ and charged at a percentage of the outstanding balance being switched. Typically this fee is somewhere between 2% and 3%, but can be more
This cost can be more than minimal. For example, switching a debt of £5,000 on to a balance transfer card charging a 3% fee would cost £150. So it’s important to check the fees and factor them in before switching. That said, if you’re paying high interest rates on your existing debt, you could still save money by moving your debt on to a balance transfer card despite the fee. Some balance transfer credit cards don’t charge a fee at all, however they may not offer such a long interest-free period.
Another possible drawback of balance transfer credit cards is that they’re not usually so generous when it comes to purchases. Some may offer an initial interest-free period of just two or three months, but then the rate will usually revert to the card’s standard rate, which could be anything from 20% to 30% APR.
Remember that balance transfer credit cards are a tool to cut the cost of your debt and repay it more quickly so it’s not a good idea to spend on them and increase what you owe. If you do need to put some spending on your credit card, it makes sense to have another card for that purpose. If you can pay your balance in full every month, look for a card that offers cash back or rewards otherwise go for one offering 0% interest on new purchases.
How to choose a balance transfer credit card
If you want to get a balance transfer credit card, the good news is it’s a pretty simple process. There are five main points to consider:
- The balance transfer fee.
- The interest rate that will be charged on your balance.
- If the card comes with an introductory 0% interest period on transfers, how long does it last?
- The interest rate that will be charged on any purchases made using the card.
- The interest rate your card will revert to on balances after an introductory 0% period has ended.
» COMPARE: Top 0% balance cards
Bear in mind that applying for credit too often can reduce your credit score so it’s best to avoid applying unless you are confident you'll be accepted.
How to get a balance transfer card
Usually, you can apply through a comparison site and get an immediate offer, but you can also apply directly to the card provider.
Once accepted, your new card provider will ask for the details of the existing credit card balance(s) you wish to transfer and will arrange the move for you within a couple of business days.
You’ll be billed monthly and will owe a minimum payment, although you should plan to repay as much of the debt as makes sense. To ensure you clear your balance before it starts costing you, consider dividing your debt by the number of interest-free months your card offers and pay that amount every month.
It might be sensible to set up a direct debit to cover your payments so that you don’t accidentally miss one. Failure to make repayments can result in the loss of the interest-free period and can harm your credit score.
Laura Whitcombe is a freelance journalist, campaigns consultant and co-author of Money Made Easy 2015/16 published by Harriman House. Read more