How do balance transfer cards work?
Balance transfer cards can help you consolidate your existing debts so that you are paying far less interest on one card, and in some instances, you may pay no interest at all if the card offers an 0% interest period. Some interest-free balance cards offer an interest period of several years, however, you are likely to pay a transfer fee in return for moving your debt over, this is usually a percentage of the overall debt you’re transferring.
Balance transfer facilities are commonly offered when you open a new card. When choosing which card to go for, consider how long it will take you to pay off your full debt. If you opt for a low fee card, they usually offer you a balance transfer fee of 1.5% and under. However, these cards generally have a shorter interest-free period, so you may find yourself paying high-interest rates on the remaining debt which you were unable to pay off during the first period.
So it would be wise to work out how much you can afford to pay off each month and how long it will take you to clear it. From there you can make your decision based on the interest-free period, not the fee.
Interest charged on transferred balances
Not all balance transfer cards offer a 0% interest period, so be sure not to assume they do. Always check the interest rates during the initial deal period and the interest rate applied after the deal has finished, ensuring you are aware of your payments during the debts lifespan.
Is a balance transfer credit card right for you?
If you are confident you will be able to pay off your debt within the interest-free period, then a balance transfer credit card is a good way to consolidate and free yourself from debt. However, if you think it will take you longer than the specified period then you may find more benefit from a credit card with a low-interest card as standard, as the interest after the lower initial period on a balance transfer card is usually quite high.
Make a soft search for balance transfer cards
Like all financial products your eligibility for the best deals depends on how good your credit score is. You should be aware that any failed applications are recorded on your credit file and have a negative impact making it less likely for you to be accepted for the lower rate, cheaper products.
You may find a card with great deal advertised however only 51% of applicants have to be accepted for the advertised rate so you may find yourself in the other 49% paying a higher rate.
You may want to conduct a soft search using our MoneyMatcher before you actually apply for one to gauge whether you’re likely to qualify for that card. This will help you to limit the number of failed applications and protect your credit rating from negative impressions.
Can you use a balance transfer credit cards to spend?
Yes, you can, but be careful using balance transfer cards to make purchases. Although they may offer a 0% interest on balance transfer this may not apply for any additional purchases made. You should make sure you check the terms and conditions before spending on a balance transfer card. Bear in mind you want to clear the balance before the interest-free period ends so try to avoid any unnecessary spending.
If you are planning on making regular purchases it may be worth comparing other types of credit cards such as cash back or reward cards that will offer you benefits for spending.
Switching your debt
In the first instance, you should aim to clear your debt. If you are only making the minimum payments it may be difficult to pay off your balance in full before the end of the interest-free or low-interest period. You will then most likely have to pay high amounts of interest on the remaining balance.
If you are unable to afford this then it may be tempting to continually switch to a new card with 0% offers, this can be a pretty risky strategy as you aren’t guaranteed to qualify for these deals every time and you may be stuck having to pay a high rate.
The wisest choice may be to opt for the card with the longest 0% interest period to give yourself the time to pay off your debt in full.