A balance transfer can help you to reduce the costs of your credit card borrowing and consolidate a range of different debts. Sometimes, they can even help you to lower your monthly outgoing expenses too. A balance transfer, or a credit card balance transfer takes place when you move the existing debt on a credit card from one card onto another card that often charges a much lower rate. Some cards even offer 0% interest for a certain amount of time, and this can help you to save a lot of money in terms of interest payments.
Transferring your balance can be a great way to ensure that you pay less on your existing debt, particularly if you’re currently paying high amounts of interest. Additionally, some people use credit card transfers to help them organize their finances and take control of their debt problems by consolidating a range of different credit card debts into a single monthly payment.
How Does a Balance Transfer Work?
Imagine, for instance, that you have built up a lot of credit card debt on your existing card. This debt might be set at an interest rate of around 18% on average, which means that you not only have the amount that you owe to pay back, but that interest too. Switching the outstanding balance on your current credit card into a 0% card that allows for balance transfers means that you will be able to ignore that typical 18% expense for a specific time period, until the deal expires. Some companies offer 0% interest for as much as three years, or even longer, depending on the circumstances.
For people who can find a way to clear all of the debt that is owed by the time the 0% interest deal ends, it’s possible to pay absolutely no interest on the balance that you might have had to pay hundreds or thousands of pounds in interest on otherwise. In other words, it’s a lot like taking out an interest-free loan.
Balance Transfer Fees
Although it’s safe to say that credit card balance transfers can have a lot of great benefits, and potentially save applicants a lot of money if they know how to manage their debts properly, there are some risks to consider too. The catch in most balance transfer cards is that there will be fees to pay. The provider of balance transfer cards has two ways to make money. The first way happens when the cardholder doesn’t clear his or her balance by the end of the 0% introductory period. These people begin paying interest when the deal ends.
The second way that balance transfer providers make money, is with a fee that is calculated as a percentage of the amount that needs to be transferred during the balance transfer. Usually, the average fee is around 3% of whatever you want to transfer. That means that if you transferred an amount of £1200, you would need to pay a fee of around £36. You should make sure that you take these fees into consideration when determining if balance transfers are right for you. However, don’t let them put you off, as you can still save money with transfers, regardless of the fees.
Keep in mind that certain cards will also offer lower fees, but they might come with a shorter period of no interest.
What to Remember with Balance Transfer Cards
Crucially, it’s a good idea to avoid spending money on balance transfer cards, as you won’t always pay the same rate of interest for purchases as you would on the transfer itself. For instance, a balance transfer card might charge no interest for a period of two years on balance transfers, but it’s interest rates might be a standard 18% on purchases. What’s more, remember to:
Make sure that the interest rate that you’ll be given after the deal expires is competitive with other cards that you can get access too.
Check for transfer limits: You’ll need to ensure that you can transfer an amount that’s in the credit limit of your new card.
Examine extras: Many credit card providers may try to sell you fraud protection services and lost card solutions. However, the benefits of these options might not be that significant as the law protects you already to some extent.
Avoid making any purchases with credit cards that you have used to make balance transfers.
Once you have successfully applied for your balance transfer card and the lending company has accepted you and given you your new card, it’s important to play by the rules. Usually, you will need to switch out any of your existing debts within a period of sixty days, and you should also check the terms and conditions of your cards to make sure that you know what you’re expected to do. Failure to act according to the rules could mean that you don’t actually get the offer you signed up to receive.