We look at balance transfer credit cards; what are they, how might they work for you and the things you should look out for.
Balance transfer credit cards can be seen as the perfect solution to shifting debt. They’re undeniably appealing with many of them offering long interest-free periods. However, a survey by the Financial Standards Authority in 2015 found that 41% of people did not understand fully how balance transfer credit cards work, and another study by Which? found that nearly 70% of people thought it was free to move money to a balance transfer card.
This means those of us opting for a balance transfer may find themselves paying credit charges that they didn’t expect. These kinds of charges – which can get costly quickly - can be avoided if you know exactly what a balance transfer credit card is and how it can work for you.
So make sure you’re in the know by reading our quick guide to balance transfers.
What is a balance transfer?
A balance transfer is where you move your existing debts onto a new credit card, usually with a lower interest rate. Balance transfers are usually meant for credit card debt, but depending on the provider you might be able to use it for other types of debt as well. What’s good about them?
A balance transfer card is good for two main things:
- Saving money on interest. Balance transfer cards usually have low or 0% interest. If you’re currently paying a high APR on your debt, it could save you a significant amount.
- Organising your debt. You could transfer all your existing debts to one card, meaning you only have one monthly payment to make.
What should I look out for?
Before you take out a balance transfer card, there are four things you should consider:
- Balance transfer fees. Most cards charge you to move your debt, typically 1-2% of the amount being transferred. It’s important to check this amount isn’t greater than the amount you will save with the lower interest.
- Promotional periods. The interest-free offer usually lasts 12-20 months, although some can be up to 40 months. It’s best to choose a longer deal unless you’re sure you can clear the debt in less time. And remember that after the 0% period ends, interest rates can shoot up.
- Transfer limits. Each card will have a credit limit, and will usually allow you to transfer 90-95% of the available credit limit.
- Down selling. If an offer says ‘up to 20 months’, this means you could be offered fewer months, and possibly a higher fee. There’s no way of knowing for sure whether you’ll get the advertised deal without applying, but using an eligibility calculator like the one on ClearScore can give you a good indication.
Do I need a good credit score?
Like with all financial products, having a good credit score increases your likelihood of being accepted for a balance transfer card. A lower credit score could mean you won’t be offered the deal shown: you might be offered a shorter 0% period, a higher APR or a smaller credit limit.
What if I’ve got a bad credit score?
If you aren’t eligible for a balance transfer card, Money Saving Expert’s Martin Lewis suggests a technique called the credit card shuffle. Instead of taking out a new card, you transfer debt between your existing cards. You can do this by calling up one of your lenders and asking if they’ll give you a lower APR if you move debts to that card. Many cards offer special deals for existing customers, or will try and match market prices.
In the long run, there are some simple ways you can increase your score and secure the best balance transfer card – see our article on 10 steps to a great credit score.
Can you give me an example?
Lisa has a balance of £2000 on a card, charging 18% APR, and she’s paying £40 a month. She takes out a 0% balance transfer card of 12 months, with a 2% transfer fee (which works out at £40). She transfers all her money to the new card. After 12 months, Lisa will have made a saving of £255.
Where do I get one?
It’s best to search the market thoroughly to find the best balance transfer card for you. Comparison sites are useful- just make sure you always check your eligibility before applying.
If you want to see credit cards you’re likely to be accepted for, head to the 'Offers' section on your ClearScore account. This lists cards selected for you based on your credit history, along with your eligibility rating. This can be handy if you’re a bit overwhelmed with choice.