How does a balance transfer work?

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How does a balance transfer work?

It feels good to get the upper hand on your finances, and balance transfer credit cards can be a great way to do just that.

Whether you’re looking to make this month’s credit card bill more manageable, or spread out the costs from recent borrowing, there are a number of reasons you might want to consider a balance transfer.

In this guide, we’ll explain what a balance transfer card is, explore the pros and cons, and answer all of your frequently asked questions to help you decide whether a balance transfer is right for you.

What is a balance transfer?

A balance transfer can help you to take control of debt, simply by moving money owed on one or more existing credit cards to a new card.

Balance transfer credit cards are appealing as they will typically offer very low, or even 0% interest for a limited time. This allows for a window during which the debt can be repaid, without needing to worry about interest building up.

While balance transfers can be helpful for managing credit card repayments, there are things to consider before making a decision.

How does a credit card balance transfer work?

Balance transfer cards work by shifting debt from one credit card to another. The balance of the old card is paid-off by the new card, and you will then owe the new card provider the amount that was paid-off.

Balance transfer cards typically offer 0% interest for a limited period of time, during which you will still need to make monthly repayments, but there won’t be any additional interest applied.

This can be a great way to get ahead, as money you would have otherwise been spending on interest can instead go directly to repaying the outstanding balance.

To open a balance transfer card, the card provider will often charge a small fee of around 3% to transfer and take on the debt.

Then, when the 0% interest period is up, the card will switch to a more typical interest rate or APR. Ideally, you should look to either pay-off the debt by the time the promotional 0% interest period is up, or switch to another card if you’re eligible.

What are the benefits of a balance transfer?

If balance transfer is sounding like the ideal solution for your needs, it’s important to weigh up the pros and cons so you can make an informed decision. With this in-mind, there are many reasons to consider a balance transfer.

Save money on interest

By switching to a card that doesn’t charge any interest for an initial period of time, you can instead put this money towards paying off your outstanding balance at a faster rate.

Consolidate multiple credit card debts

By consolidating multiple credit card debts onto a single card, you can focus on a single and more manageable monthly payment, rather than needing to make several payments each month.

Switch to a more favourable card

Your current card might have a high interest rate, or have terms that don’t offer much for you as the cardholder. Depending on cards you are eligible for, you may be able to find a card with more favourable rates. Some cards might even offer rewards and other perks.

Things to consider before applying for a balance transfer

With so many potential advantages, you might be asking yourself “What’s the catch with balance transfers?”

Well, like any financial product, they come with some things to consider to make sure it’s the right choice for you:

You might have to pay a balance transfer fee

Balance transfer cards will typically charge a fee for making the switch. This will usually be a percentage of the amount you will be transferring, often around 3%.

So for example, if you’re looking to transfer a balance of £3,000 and the balance fee is 3%, you’ll be required to pay a fee of £90.

The low interest rate will eventually come to an end

One of the biggest draws of a balance transfer card is the introductory low interest period offered by many, which can vary anywhere from 4 months to 21 months.

However, this promotional period won’t last forever. When it’s up, the card’s usual APR will apply. It’s best to keep track of when the low interest period will be ending and make sure you’re ready for it, to avoid getting caught off-guard.

You might increase your debt

Even though many balance transfer cards charge no interest for an introductory period, you will still be required to make agreed regular payments.

Like any form of borrowing, it’s important to stay on top of these to avoid additional charges or interest being applied to your debt. Missed payments can also negatively impact your credit score, making it harder to borrow in the future.

Your eligibility may depend on your credit score

Before approving you for a balance transfer card, a provider will often review your credit score to see what your borrowing history looks like.

This may impact your eligibility, or the terms of your balance transfer card.

How to do a balance transfer

To get started with a balance transfer, simply follow these five steps:

1) Calculate how long you’ll need to pay off your balance

An easy way to do this is to determine how much you can comfortably afford to pay off each month, then divide your total outstanding debt by this figure. So, for example, consider that you can afford to pay £150 per month and your debt is £1,500. In this case, it would take you 10 months to pay off the debt, so you might want to find a balance transfer card that offers a 12-month introductory period with 0% interest.

2) Choose the right card for you

Our credit card search tool makes it easy to find cards that would be suitable for balance transfer. To make things easier for you, we remove the complex jargon and label each card with their ideal purpose. Just look out for the labels “Transfer deal” or “Total flexibility” on any cards.

To make things easier for you, Freedom Finance removes the complex jargon and label each card with their ideal purpose. Just look out for the labels “Transfer deal” or “Total flexibility” on any cards.

3) Verify the credit limit and fees

It’s important to check the credit limit to be sure it is enough to pay-off your existing card debt, as well as any fees for opening the account.

The credit limit offered will depend on your individual circumstances. You might not necessarily receive the maximum credit limit straight away, but may be able to increase the credit limit in the future.

4) Complete your transfer

Once your application has been approved, the credit card provider will complete the transfer and you will be able to cancel your old cards.

5) Use the new card wisely

Now that the balance transfer has been completed, you can focus your attention on budgeting to meet the regular payments agreed on in the terms.

Common questions about balance transfers

Here are some of the more frequently asked questions relating to balance transfers.

What is a 0% interest balance transfer?

A 0% interest balance transfer card, also referred to as 0% APR, is a card that won’t charge any interest on the outstanding balance for an initial promotional period.

What is a balance transfer fee?

A balance transfer fee is an upfront payment that a credit card provider will charge for the balance transfer service. It will be calculated as a percentage of the total amount being transferred, often around 2-3%.

How much can you save with a balance transfer?

The amount you can save with a balance transfer will depend on how much you are able to repay each month, and the terms of the card that you choose. In an ideal scenario, a balance transfer card will save enough each month to allow you to pay off your outstanding debt before the introductory low interest period ends.

When is the best time to do a balance transfer?

Generally speaking, it’s best to do a balance transfer when you aren’t planning for any further upcoming large expenses and have a few open months ahead. This means that you can take full advantage of the low interest period without accumulating any additional debt.

Will a balance transfer affect your credit score?

Making any credit application can cause a temporary dip in your credit score. If you decide to cancel your old cards, this could also lower the amount of credit available to you. Doing this reduces your credit utilisation rate, which is the amount of credit you use compared to the amount you have available to you.

On the other hand, taking out a credit card will increase the amount of credit available to you. Doing this would improve your credit utilisation rate. Your credit score may also improve if you’re able to actively reduce your debt as a result of transferring a balance.

Our credit card finder can help you check which credit cards you’re eligible for before you go ahead and apply. It only uses a ‘soft credit search’, meaning it won’t appear on your credit report or impact your credit score.

What happens to old cards after a balance transfer?

You might be tempted to immediately close your old card accounts once their debts have been repaid. This may negatively impact your credit score in the short term however, as it will increase your debt-to-credit ratio. Instead, you might prefer to keep some of your old cards open and use them for manageable regular payments that are easy to stay on-top of.

Is a balance transfer card right for you?

Is it a good idea to do a balance transfer? The answer to this will ultimately come down to your individual circumstances and finance needs.

As a general rule of thumb, if you’re able to pay off the debt within 3 months, then you’re likely better sticking with your current card and paying it off as soon as possible. If you need a higher credit limit and don’t mind paying interest, a personal loan for debt consolidation is also an alternative to look into.

If you need a longer period of time to repay the balance, then a balance transfer credit card is a valuable route to consider.

If you’re ready to get started with balance transfer, our credit card search tool makes it easy to find and compare cards. We do this by searching multiple card providers and marking the cards most suitable for a balance transfer as “Transfer deal” or “Total flexibility”.