What is a balance transfer: Everything you wanted to know

In a world where credit card debt is a common concern, balance transfers can offer a lifeline to those struggling to manage mounting interest charges. For many, understanding what is a balance transfer and how it operates can often seem daunting. This guide is here to demystify the process and serve as a guide on how balance transfers work, their potential savings, and what to consider before initiating one.

How Do Balance Transfers Work?

Balance transfers are a feature of many credit cards. It is the process of moving debt from one credit card (Card A) to another credit card (Card B) that typically offers a lower interest rate. This move is usually beneficial when Card B has a lower APR (Annual Percentage Rate) or provides a promotional period with a reduced interest rate, often referred to as a balance transfer offer. These are particularly useful in times of raised interest rates.

How Much Money Can You Save With a Balance Transfer?

The potential for savings through a balance transfer is significant, but the actual amount depends on several factors: the interest rate differential between the two cards, the amount of debt transferred, and the length of the lower-interest promotional period on the new card.

Consider the example of having £2000 debt on a credit card with an APR of 18%. If you transfer this balance to a card offering a 0% interest rate for 12 months, and you repay the balance within this period, you could potentially save around £360 in interest over the year. However, it's important to note that most credit cards charge a balance transfer fee, often around 3% of the transferred amount, which in this case would be £60. Hence, your net savings would be around £300.

Furthermore, if you don’t pay it off within this year, the interest rate may go from 0% to a number higher than 18%, meaning it’s not always as lucrative as it seems.

What to Consider Before Completing a Balance Transfer

Balance transfers can be a powerful tool, but they're not always the right solution for everyone. Before committing, consider the following:

Balance Transfer Fee:

Most credit card companies charge a fee for balance transfers, typically between 1-4% of the transferred amount. This fee can offset your potential savings.

Promotional Period:

Make sure to check the length of the lower-interest promotional period. If you're unable to pay off the balance within this period, the higher interest rate that follows might make the transfer less beneficial.

Credit Score Impact:

Applying for a new credit card can result in a temporary dip in your credit score. Therefore, if you're planning on applying for a large loan (such as a mortgage) soon, you might want to hold off on the balance transfer.

How to Do a Credit Card Balance Transfer

Once you've decided a balance transfer is right for you, the process is fairly straightforward.

You start off by checking your current balance on Card A (current credit card) and credit limit on Card B (the credit card you will be transferring to). Ensure you know how much you owe, how much debt you want to transfer, and if you have enough credit limit on the new card.

But also conduct some thorough research on this new card, such as promotional time frame, future APR, fees, and likelihood of gaining approval.

Now, you are in a position to apply for the credit card and request a transfer.

Learn more: A step by step guide to transferring a credit card balance

Requesting the Transfer

There are two common ways to request a balance transfer: either over the phone or online. You'll need to provide your old credit card account details, including the account number and the amount you wish to transfer. Your new card issuer will then handle the transfer process; it usually takes several days, but it could under some circumstances take a couple of weeks.

Beware the Grace Period

A crucial aspect to bear in mind during a balance transfer is the grace period, which is the time between when your statement closes and when your payment is due. During this period, no interest is charged on new purchases.

However, if you're transferring a balance to a new card, you may lose this grace period for new purchases until you pay off the transferred balance in full. It’s advisable to refrain from making new purchases on your new card until your transferred balance is fully paid off to avoid accruing additional interest.

Transfers to Existing Cards

You might already have a credit card that offers a balance transfer promotion. In such a case, transferring a balance to an existing card can be an attractive option, saving you the trouble of opening a new credit card. However, ensure that the promotional offer applies to transfers on existing accounts and remember that the credit limit on your existing card may restrict the amount you can transfer.

Navigating the world of balance transfers can be complex. It’s vital to thoroughly consider the terms of the new credit card, along with your own financial situation. Balance transfers can be useful, but they shouldn’t be abused or frequently relied upon.

Next step: Compare balance transfer credit cards without harming your credit score.