Balance transfers

What is a balance transfer?

A balance transfer is where all or part of your debt is transferred from a purchase credit card to one which benefits from a reduced interest rate.

Why do it?

Balance transfers are a great way to slow down your debt by reducing the interest attached. If you have spent on a purchase card, and are paying a high interest on the balance, you can transfer it to a card that has 0% interest for a set period of time. If you can manage to repay this amount within the deal period, then you will not have to repay any interest at all. If the deal term passes, you will just pay interest on the remaining sum. So in effect, you have received an interest free consolidation loan.

Things to consider…

  • The best deals are usually reserved for those with an excellent credit score.
  • A minimum payment MUST be made each month. Failure to make a do so can lead to penalty charges or a full interest charge.
  • Don’t forget the transfer fee! Although the interest can be set at 0% for a time, there will be a fee, usually around 3% of the balance, to make the transfer. If 3% sounds too high, there are other cards available which offer a lower transfer fee but with a reduced 0% interest period.
  • Don’t use your balance transfer card to make purchases! The rates for spending are likely to be much higher than they were on the original credit card.
  • You will need to switch the balance within a couple of months of opening the balance transfer card to benefit from the advertised deal, so don’t delay!
  • It’s not a good idea to keep switching the card balances, as this will be recorded on your credit score and affect it badly.
  • You can plan the repayment of the debt by transferring the balance to a 0% interest card and setting up a direct debit, which divides the remaining balance between the number of months that the 0% deal lasts. This means your debt can be fully repaid at 0% interest.
  • You can’t balance transfer between the same banking group, so check who is affiliated before applying. For example, NatWest and RBS are members of the same banking corporation so they would not allow a balance transfer between the two companies.
  • If you can’t fully repay the card at the end of the interest free period, you could try making one more switch. This will give you longer to repay the debt at the lower interest; otherwise the remaining debt will incur interest that is perhaps higher than what you were originally paying on your purchase card.
  • If you want to clear the debt in one sum at the end of the interest free period then you can do so, but don’t forget to continue to pay the monthly minimum payments! Failure to do so will damage your credit rating, regardless of whether or not you clear the balance at a later date.
  • If at the end of the interest free period you cannot afford to clear the remaining balance, it may be worth arranging a loan to cover the required amount. The loan may provide a cheaper alternative to paying the high interest rates on the card.
  • Use price comparison websites to compare offers and choose the best suitable deal for you.