Balance transfers explained

Customers talk about what balance transfers are, and how they help them pay less interest to clear their debt

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We thought you’d like to hear the low-down on balance transfers from somebody who doesn’t work for us. So we asked personal finance journalist, Emma Lunn, for her view. Read on for Emma’s jargon-free guide to balance transfers, how they work, how they affect your credit rating, and how much they could save you.

What exactly is a balance transfer?

A balance transfer is where part or all of a debt balance on one credit card is transferred to a new card, usually to save money on interest rates. In most cases, borrowers will move a debt from a card charging interest, to one offering 0% interest on balance transfers, for a set number of months or years.

During this time period all the payments you make on the debt will go towards paying off the capital, not paying interest. This means you will save money compared to a scenario where you were paying interest on your debts – assuming the balance transfer fee isn’t more than the interest you save.

Is there a fee involved when you transfer balances?

Most balance transfer deals come with a balance transfer fee. Normally 1 to 3% of the balance to be transferred, this will reduce the money you save so it’s important to do the sums. For example, if you transferred a balance of £1,200 and the card had a 2% balance transfer fee it would equate to £24.

Borrowers need to take the balance transfer fee into account to work out how much money they would save by switching to a 0% balance transfer card. For example, say you had a £1,200 balance on a card charging an interest rate of 18% and you repaid £100 a month. It would take 14 months to clear the debt and you’d pay a total of £122 in interest.

If you switched the debt to a card charging 0% interest for 12 months with a 2% fee (£24), and continued to pay £100 a month, you’d repay the debt in 13 months and have saved £98 (£122 minus £24).

If you do a 0% balance transfer, what happens at the end of the 0% period?

When the 0% balance transfer period ends any remaining debt on the card will start accruing interest at the standard rate of interest. To avoid paying this interest you can switch the remaining debt to a new 0% balance transfer card. However, bear in mind that you cannot switch debts between cards offered by the same provider, such as two different Barclaycards. Your credit history will also influence the number of credit cards available to you.

How much of my balance can I transfer?

Can you only make balance transfers from other cards?

How much interest, if any, is charged on balance transfers?

Even though a 0% balance transfer card won’t charge interest, you still need to make repayments of at least the minimum amount each month. The card provider sets the minimum payment, normally between 2% and 5% of the outstanding balance. You should check with your credit card provider what the minimum payment will be – it will be shown on your credit card statement. However, be aware that just paying the minimum each month means that money borrowed will take longer to pay in full.

What happens if I miss a payment?

If you miss a payment, you'll lose your 0% deal, so the rate will jump and you'll get a missed payment charge. To avoid missing payments, you can set up a direct debit for the minimum repayment as soon as your card is up and running.

However, in an ideal world you would pay more than the minimum each month. For example, if you transferred a balance of £2,400 to a card that charges 0% interest on balance transfers for 24 months, you could set up a direct debit for £100 a month and you would be debt-free by the end of the 0% offer.

Do balance transfers affect my credit rating?

Lenders will assess your credit rating as part of their decision process regarding whether or not to lend to you. If you continually swap credit cards, or have several credit cards running at the same time, this will affect your credit rating. For this reason it’s a good idea to work out a plan, including timescales, to pay off your debts and then look for the most suitable card.

For example, if you think it will take two years to repay your debts, look for a card that offers 24 months interest-free on balance transfers, switch your debt to it and set up monthly repayments to ensure the debt is repaid.

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What is a Balance Transfer?