8 min read

Balance transfer cards explained

Lucy Burgess
22 March 2018

According to the Financial Standards Authority 41% of people don't fully understand how balance transfer cards work. So let us try and explain them.

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. This can be ideal if you're looking to pay off your credit card debt for next to no cost over a number of months or even years.

However, a survey by the Financial Standards Authority in 2015 found that 41% of people did not understand fully how these cards work, and another study by Which? found that nearly 70% of people thought it was completely free to move money to a balance transfer card.

That means that those of us with a balance transfer card are risking paying fees and charges we didn’t expect to pay when we took out the card. Not only could this get quite expensive but in some cases it could even invalidate the interest-free period on the card.

So if you have, or you're thinking of getting a balance transfer card, it pays to know exactly how it works and which terms and conditions typically apply to this card.

(VIDEO: If you're short on time, skip to the end and watch a quick video)

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What is a balance transfer?

A balance transfer is where you move your existing debt 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.

Advantages of balance transfer cards

A balance transfer card is mainly good for two things:

  • Saving money on interest

    Balance transfer cards usually only charge a low or, in most cases, 0% interest rate. This means if you’re currently paying a high APR on your debt, or any interest at all, you could save money by moving your debt onto one of these cards.

  • Organising your debt

    One of the main advantages of a balance transfer card is that it allows you to put your debt in one place. In theory, this makes your debt more manageable, because you only have one monthly payment to worry about, not several, which makes it easier to keep on top of your payments.

Things to be aware of when it comes to balance transfer cards

Before you take out a balance transfer card, there are four main things you should consider:

  • Balance transfer / handling fees

    This is the main 'catch' with balance transfer cards. In most cases, you'll have to pay a fee when you move your debt onto your balance transfer card - typically 1-3% of the amount being transferred. So if you're transferring £1500 from an old card to your new balance transfer card, and there's a handling fee of 3%, you'll be charged £45.

    The key here is to check any handling fees you'll have to pay won't cost you more than the amount you'd save by switching to a balance transfer card.

  • Promotional periods

    The interest-free offer periods on balance transfer cards usually last between 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. Be aware that after the 0% period ends, interest rates can shoot up.

  • Transfer limits

    Most balance transfer cards will have a limit on how much debt you can transfer onto your card. Usually you'll be able to transfer 90-95% of the available credit limit on your balance transfer card.

    So for example, if your balance transfer card allows you to transfer 95% of your credit limit, and the limit on that card is £4,000, you'll be able to transfer £3,800 from other places.

  • Balance transfer cards are for balances

    If you have a 0% interest period on a balance transfer card, this will usually only apply to the balances you move onto your card. What probably won't include is 'purchases' - this is whenever you use your card to pay for something - whether it's petrol, a new suit or a holiday.

    Some balance transfer cards will come with an offer on purchase transactions too too - but it might not be for the same length of time, so make sure you check exactly what offer periods you have and on what type of transactions before you use your card.

  • Avoid taking out cash on your balance transfer card

    The offer period on a balance transfer card won't apply to cash transactions on your card - this includes taking cash out of an ATM or buying foreign currency. If you do take cash out on your card, chances are it could come with very high charges and interest rates, and it could also cancel out any 0% interest offer you have on your balance.

  • Down-selling

    If an offer says ‘up to 20 months’, this means you could be offered fewer months, and possibly a higher handling fee than advertised. 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.

Your credit score and balance transfer cards

Do I need a good credit score to get a balance transfer card?

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 - for example, you might be offered a shorter 0% period, a higher APR or a smaller credit limit.

Generally speaking, cards with 0% interest do tend to be reserved for people with higher credit scores. So as soon as you're thinking about taking out a balance transfer card, it's worth working to improve your credit score. This way, you're putting yourself in the best position to get the best offer on a new card.

What if I’ve got a bad credit score?

If you aren’t eligible for a balance transfer card, there are other things you can do to try and juggle your credit card debt. Snowballing is one technique (see point 6 in this article), but you could also try transferring your debt between existing cards with the lowest APR rate.

If you're planning on sticking to your current cards, it might be worth 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.

Balance transfer cards through ClearScore

ClearScore search 95% of the market to show you the best balance transfer card for you. We list 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.

If you want to see which cards have been selected for you, head to the 'Offers' section on your ClearScore account.

VIDEO: Lily explains what you need to know about balance transfer cards (1m42s)

by Lucy Burgess

Lucy has a background in law. Having spent a considerable amount of time researching personal finance, she's one of our in-house experts. 

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