What is a balance transfer credit card?

How do balance transfer credit cards work?

Balance transfer credit cards work by moving your debt from an existing credit card to a new one that won’t charge you interest for a set period of time. Your new credit card provider will pay off the balance of your old card.

Typically, balance transfer credit card providers will offer a 0% interest rate for a period ranging from 6 to 24 months. This means you’ll save money by not paying interest on top of what you already owe, giving you more time to pay off your balance without paying expensive interest rates.

Most balance transfer credit card providers will charge a fee for making the transfer, usually between 1% and 4% of your existing balance, although some providers will also offer 0% balance transfer fees.

At the end of your 0% interest-free period, you’ll start to pay interest on your balance if you haven’t paid it off in full. You could then apply to another balance transfer provider again to give you more time to pay off your balance without being charged expensive interest rates.

However, it’s worth considering that applying for too many balance transfer cards in a short period could harm your credit score.

Balance transfer example

Here’s an example of how a balance transfer can save you money in interest:

• You have a credit card with an outstanding balance of £2,000 that charges an interest rate of 24.9%

• You apply for a balance transfer card that comes with an 18-month 0% interest-free period and charges a transfer fee of 3%

• You transfer your existing balance to the new card and add the fee, leaving you with a balance of £2,060

• You can then divide the balance by the number of interest-free months you have to work out the monthly payments you need to make to clear your debt - £2,060/18 = £114.45

• If you made the same repayments on your old card, it would cost £445 in interest and take 22 months to pay off

In this example, you would save £385 and pay off your outstanding debt four months faster by doing a balance transfer. 

What is a balance transfer fee?

A balance transfer fee is the cost some credit card companies charge when you transfer your debts from one card to another. Some companies charge as much as 5% of your balance, but they are typically between 1 and 4%. 

For example, if you want to transfer a balance of £2,000 and the fee is 3%, you will be charged £60. The fee is usually then added to your balance, so you’d need to pay back £2,060. 

Some providers may specify a minimum balance transfer you have to pay, for example, £5. This may apply if you are transferring a small balance, e.g. if you want to transfer £100, and the fee is 3%, you would pay the minimum fee of £5 rather than £3. 

Some providers offer balance transfer credit cards with no fee, so it’s always worth comparing online to see if you can avoid paying extra. However, no fee cards usually come without an interest-free period or a period of only a few months. 

 How to do a balance transfer

Here are the steps you need to take to make a balance transfer:

1. Work out what you owe. If you want to clear all your credit debt, add up the outstanding balances so you know what credit limit you’ll need on your new card. Remember that most providers only allow you to use up to 90% of your limit on balance transfers.

2. Compare balance transfer deals. Find a new balance transfer credit card that allows you to cover all of your credit card debts and comes with a 0% interest rate that works for you.

3. Apply and set up the transfers. When you apply for a new card, you can request to transfer the balance to pay off your current debts. If you don’t set them up immediately, you usually have 60 or 90 days to request them before you lose the 0% offer.

4. Close your old cards. Once your old cards have been cleared, contact your existing providers and ask them to close the accounts for you.

5. Start paying off the balance. It’s worth working out how much you’ll need to repay each month to clear your debt before the end of the 0% period. If possible, set up a direct debit for this amount to ensure you don’t start paying interest. 

Types of balance transfer credit card

You can get a few different types of balance transfer cards, and each offers slightly different benefits. Which option is right for you will depend on your financial situation - here are the types of cards you can choose from:

• 0% interest balance transfer card: The most common type of card, this allows you to transfer your existing debts onto one card that offers an interest-free period. These usually charge a one-off transfer fee.

• No-fee balance transfer card: This type of card doesn’t charge a balance transfer fee, but they don’t usually come with long 0% periods. Some may offer a low introductory interest rate or a short interest-free period.

• Balance transfer and purchase cards: This option is ideal if you want to clear existing debt and use the same card to make purchases. You can usually pay 0% on balance transfers and any purchases you make.

What happens when the interest-free period ends?

Once your agreed interest-free period is over, you’ll be charged a new interest rate, which you will have been confirmed when you applied for the card.

You will start to owe interest on any unpaid balance on your card. You’ll also be charged interest on your interest, which means your debts may quickly build up if your card has a high interest rate. Therefore, it’s always best to pay off your balance as soon as possible.

If you cannot clear the balance before the 0% period ends, it’s worth looking to do another balance transfer. This could give you another period with no interest to pay off your debt but remember, you will need to pay another balance transfer fee. 

How to manage your balance transfer credit card

Here are some tips on how to make the most of your balance transfer card and avoid paying more than you need to:

• Pay off the balance before the end of the 0% period

• Work out how much you need to pay each month to clear your balance and set up a direct deposit for this amount

• Set a reminder to alert you when the interest-free period is over to make sure you’ve paid off your card

• If you can’t clear the balance in time, apply for another balance transfer card rather than pay interest on your current card

• Make sure the cost of the balance transfer fee doesn’t outweigh any savings you will make in interest

• Avoid using your card for purchases, as this will incur interest charges unless you have a balance transfer and purchase card

• Make sure you don’t miss a payment, as this means your interest-free period could be withdrawn, you incur a penalty fee, and your credit score could be impacted