If you’ve spent any time looking at credit cards, you’ll no doubt have seen the phrase ‘balance transfer’. This article explains exactly what this means.
As explained in our guide to different credit card types, balance transfer credit cards make up the majority of new credit card sales in the UK and there’s a good reason for this; when used well they’re great.
What is a ‘balance’?
A ‘balance’ is an outstanding debt. Typically this debt will exist on an older credit card or a store card. You may have found that you’re constantly being charged interest on some old debt; if so, it might be time to transfer it.
What is a balance transfer?
A balance transfer is when you move existing debts (the ‘balance’), from one or multiple cards onto a single card.
How do balance transfer cards work?
There are two main considerations when looking at balance transfer credit cards; the balance transfer fee and the balance transfer promo length.
When you perform a balance transfer, you may incur a fee. This will be a percentage of the total balance you are transferring.
e.g. if you are transferring balances totalling £1,000 and the fee is 2%, your new balance will be £1,020 on the new card (£1,000 x 1.02)
The second element, the balance transfer promo length, is the amount of time the credit card provider won’t charge you interest on your balance. This promo length is normally quoted in months and can be longer than 42 months! Typically, the longer the promo length is, the higher the fee.
Who are balance transfer credit cards good for?
If you have a credit card debt that’s costing you money and you want to reduce it, a balance transfer card could be good for you. The promo length should be sufficient enough for you to reduce your remaining balance of debt to £0 whilst making monthly payments that are affordable. Doing the maths first and setting up a direct debit accordingly is the smartest way to do this.
e.g. a £1,000 debt on a 36 month balance transfer card with a 2% fee. On performing the balance transfer, the debt becomes £1,020 (£1,000 x 1.02). You then have 36 months to pay off that £1,020 debt before you’ll start to get charged interest. That’s £28.33 per month to be paid by direct debit.
How can I make sure I’m using my balance transfer card properly?
As described above, ideally you should be aiming to reduce your debt balance to £0. Use the example above to calculate the payments you should be making to clear the balance.
Additionally, the balance transfer promo terms often only apply to a specific period. This means you should be performing the balance transfer either during the application for the credit card or within 30 days (always check your terms and conditions as this changes by provider). If you miss this window, you’ll often incur big fees.
Second point to mention is that balance transfer cards often come with a purchases promo period as well. This is a period of time during which you want get charged interest on any new purchases either. The purchases period is often shorter than the balance transfer period and it can be hard to track how long you’ve got left. If you do use the card for purchases pay off the purchases amount in full at the end of the month. If the purchases promo period has expired, many providers will start charging interest from the day the spend was incurred. This can really add up, so be careful and make sure you are familiar with your credit card providers terms.
Finally, set a reminder in your phone, diary or calendar for when the various promo periods end and change your behaviour with the card accordingly. As you approach the end of your balance transfer promo period you might want to start shopping around for a new balance transfer card if you haven’t already cleared your balance.
To boost your chances of getting a balance transfer credit card, read our guide on improving your credit score.
