What is a Balance Transfer Credit Card?
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 the old one(s). This guide will show you how they work, what fees are involved, and more.
If you’re paying interest on your credit card, you could be missing a trick. You may be able to cut the amount of interest you’re paying simply by moving your debt to a balance transfer credit card.
As long as you pay off your credit card balance before the higher interest rate on your new card applies, a balance transfer card can help you to save money on interest and clear your debt quicker.
Read on to learn more about how balance transfer credit cards work and whether they could be an option for you.
What is a balance transfer?
A balance transfer is when you move debt from your existing credit card to another credit card with a lower interest rate.
Many balance transfer credit cards will come with an introductory 0% interest period, which means you won’t need to pay any interest on your credit card balance for a specified number of months. This interest-free period can range from a few months to more than two years.
You will often need to pay a balance transfer fee to shift your credit card debt. This would typically be between 2% and 4% of your credit card balance.
The main point of a balance transfer is to minimise the amount of interest you need to pay and, because you won’t be paying as much in interest, it should help you to pay off your balance sooner.
However, to get these benefits, you need to pay off your credit card balance in full before the low or 0% interest rate expires, otherwise you could face higher interest charges.
Balance transfer credit cards can also help you to consolidate debts from a number of different cards, which could make it easier for you to manage your repayments.
How do balance transfer credit cards work?
Below is an example to show how balance transfer credit cards work.
Let’s say you have a credit card with a balance of £2,000 that is charging 20% in interest. This means a significant amount of your monthly credit card payments would be used to pay the interest charges you accrue each month rather than clearing your balance.
But you might be able to move this debt on to a balance transfer credit card with a lower interest rate.
For example, you may find one that charges 0% interest for 18 months. This means you won’t be charged interest on your credit card balance for this 18-month period and your monthly payments would go entirely towards paying off your debt.
However, after the 18-month period, the provider will start charging interest. If you haven’t cleared your credit card balance by the time this 0% period expires, you will need to pay interest on what you still owe.
In some cases, you may need to transfer your credit card balance(s) within a certain number of days after getting the credit card in order to qualify for the 0% rate. Any balance you transfer after this period could be subject to the standard interest rate.
You can typically transfer a balance worth up to 90% to 95% of the credit limit on the balance transfer card.
Bear in mind you’re not normally allowed to transfer balances between cards from the same provider or financial group.
Balance transfer fee
You will often need to pay a balance transfer fee to move debt from one credit card to another. This can be around 2% to 4% of your total balance and will normally be added to your credit card balance.
For example, moving a debt of £2,000 on to a balance transfer card charging a 3% fee would cost £60. It’s important to check the fees and factor them in before applying for a balance transfer.
Despite the fee, if you’re paying high interest rates on your existing debt, it’s possible you could still save money overall by moving your debt on to a balance transfer card.
Some balance transfer credit cards don’t charge a fee at all, however they may not offer such a long interest-free period as others.
Even though you don’t need to pay interest on a 0% balance transfer card, you will still need to pay the monthly minimum payments at the very least. What’s more, you’d likely need to pay more than the minimum amount each month in order to have paid off your balance before the end of the 0% period.
If your wider finances allow, to ensure you clear your credit card balance before the standard interest rate applies, consider dividing your debt by the number of interest-free months your card offers and pay that amount every month.
For example, if your balance is £2,000 and your interest-free period is 18 months, you could pay off your balance in monthly instalments of around £112 to clear your debt and avoid paying interest. This is assuming you don’t run up any further debt or fees on your credit card.
If you have other debts or financial obligations, you should always consider the priority in which these should be paid.
» MORE: Getting out of debt
What happens to your old credit card after a balance transfer?
If you have moved your debt from one credit card to a balance transfer card, there are no rules as to what you should do with your old card.
You may choose to continue to use your card. However, if you do this, you should only spend what you can afford and aim to clear your balance to avoid paying interest and running up debt.
Alternatively, you could choose to close your credit card. However, be aware that this could affect your credit utilisation rate (the overall percentage of credit you’re using) and, consequently, your credit score.
When you close a credit card, your available credit will decrease. This means the proportion of debt you have compared to the credit you have available would increase, and this could affect your credit score.
For example, if you have outstanding credit card debt of £2,000 and an available credit limit of £5,000 across two cards, you would only be using 40% of your available credit. If, however, you closed one credit card with a credit limit of £2,500, your available credit would drop to £2,500 which means with your £2,000 credit card debt, you would be using 80% of your available credit.
Advantages of balance transfer credit cards
The main advantages of taking out a balance transfer credit card are:
- You can avoid paying interest on your credit card debt, or pay a lower rate of interest than you are on your current card, as long as you pay off the debt in full before the introductory low-interest rate ends.
- You can move debts from multiple credit cards on to one card, which could help you to manage your repayments.
Disadvantages of balance transfer credit cards
Balance transfer cards also have some disadvantages, including:
- You will often have to pay a balance transfer fee, which is charged at a percentage of the outstanding balance being switched.
- After the 0% period ends, the interest rate on your balance transfer card will revert to the card’s standard rate. So if you don’t pay off your debt before then, you may need to pay high interest charges.
- You may be charged interest if you use a balance transfer card for any other reason, such as spending, unless otherwise specified. Some cards will include 0% interest on purchases as well as the transfer, but this may be for a different period than the one offered for balance transfers.
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 can also be convenient to have all your card debt in one place, so you just have one monthly payment to take care of.
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, a balance transfer credit card might be worth exploring.
When managed sensibly, balance transfer credit cards can help cut the cost of your debt and repay it more quickly so, if you get one, you should try not to use it for spending, which would increase what you owe.
» MORE: Should I get a credit card?
Can I transfer someone else’s balance to my card?
There may be a time when you want to transfer someone 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 sometimes possible, and many card providers allow balances to be transferred between partners and dependants.
But, while transferring someone else’s balance to your card can greatly improve family finances, remember that in doing so you become responsible for paying off their debt. So always think carefully about the consequences.
How to get a balance transfer credit card
When you’re comparing balance transfer credit cards, there are five main points to consider:
- The balance transfer fee and any other charges that might apply, including annual fees.
- The introductory interest rate that will be charged on your balance.
- How long the introductory 0% or low interest rate lasts.
- 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 the introductory 0% or low-rate period has ended.
Before applying for a balance transfer credit card, it’s a good idea to check whether you are eligible first. By doing this, you can see what credit card deals you might qualify for, and so minimise your chances of applying for an unsuitable card and getting your application rejected.
Applying for a credit card involves a hard credit check, which will leave a mark on your credit history and could affect your score. However, checking your eligibility for a balance transfer card won’t affect your credit history and it can help you see which deals you are likely to be accepted for.
» COMPARE: 0% balance transfer credit cards
Laura Whitcombe is a freelance journalist, campaigns consultant and co-author of Money Made Easy 2015/16 published by Harriman House. Read more
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more