What is a 0% Balance Transfer Card?
Getting a credit card is a bit like being given special permission to dip into someone else’s money pot. You’re expected to put the money back in the pot, along with a bit extra to pay for the service. How much extra you have to put in depends on how much you’ve taken, how long it takes you to put it all back and what the rate of interest is set at.
A higher interest rate means it could take you longer to refill the pot because you’ll need to chip away at the interest too. Reducing the amount of interest you pay can help you clear debts more quickly and reduce the cost of borrowing overall. A balance transfer card can help you get things started. Paying no interest at all means the money you owe stops growing and for this you’ll need a 0% balance transfer card.
Sounds like magic, huh? Here’s how it works...
What is a balance transfer card?
When you’d like to lower the rate of interest you’re paying on your credit card balance you may be able to search out a card with a lower rate of interest and transfer your debt onto the new card. You’ll be asked to pay a percentage of you balance upfront as a transfer fee but could end up paying much less to clear your debt. At the moment, some providers are offering a no interest balance transfer for periods of a few months up to three years, which could really take the pressure off, right? Be sure to pay the full balance off before the interest-free period ceases, to avoid a rise in payments.
How a balance transfer card works
You’ll need to pay at least your minimum payment every month to retain special rates, avoid charges, protect your credit rating and ensure you’re reducing your debt. With this in mind, the best way to take advantage of how a balance transfer card works is to calculate how long your special rate lasts for and divide the total sum you owe (including transfer fee) by the number of months you have to clear it. By treating your credit card debt like a personal loan with fixed payments, you will then have confidence that you’ll owe no money before any higher interest rate kicks in.
Be aware of time and credit limits
There are some rules you need to be aware of if you’d like to carry out a balance transfer. You’ll often be required to complete a transfer within a certain time period of opening the card in order to qualify for special rates and you won’t usually be able to transfer a balance from the same card provider onto a new card.
Your card provider will set your credit limit based on your credit profile and you won’t necessarily be granted a limit that will allow you to transfer your full balance from another card or multiple card balances. It’s also important to know that most card providers cap the percentage of your credit limit that you can take up with transfers, usually around 80-90%.
Even if you can’t transfer a total balance from another card, it may be cheaper to reduce the interest on the amount you can transfer. Though you’ll need to remember to make monthly payments to two cards instead of one. You could look to transfer any remaining balance from your old card in the future once you have freed up some space, if you still qualify for a special or lower rate.
Whenever you carry out a transfer it’s important to balance the cost of the transfer combined with your new interest rate against the cost of interest payments saved. Though with transfer fees generally costing up to 3% and standard APRs hovering in the late teens, you could potentially save hundreds or more by switching depending on what you owe.
Some cards actually offer a cashback fee for opening them, provided you transfer a balance in a specific time period. Depending what your balance is, this could mean you effectively receive part or all of your transfer fee back.
Is a balance transfer card right for me?
Balance transfer cards are targeted specifically at those who want to clear debt more cheaply and often have high interest rates for purchases with the exception of cards that also offer 0% purchase periods. You should never withdraw money from the ATM using this type of card or as a general rule, from any type of credit card. Doing so usually incurs high rates of interest and isn’t viewed favourably by credit reference agencies.
If you’re not confident you’ll be able to clear your debt completely during the interest free period, you may be better off looking for a low interest balance transfer card that allows you to clear in a longer timeframe. This is because just one or two month’s interest at a higher rate could wipe out the savings made by your transfer.
Not sure a 0% balance transfer card is for you? See our guides to understanding credit cards, which credit card is best for me or find alternatives to credit cards here.
Compare balance transfer card
Want to reduce the interest you’re paying with a balance transfer card? The best deals are, as you’d expect, reserved for those with the most impressive credit ratings. With this in mind, it’s always a good idea to check your credit record for any issues before making an application.
To avoid creating a ruckus on your credit record by firing out applications, use a tool like our MoneyMatcher to highlight deals may be available to you. Not only will it conjure up matches that are tailored to your requirements but it also breaks down the important points you’ll need to compare and contrast, such as the total cost of borrowing, APR and transfer fees and other charges such as annual card fees. Fancy features like cashback or other reward schemes are also highlighted so you can seek out the card that’s right for you.
Remember headline rates
When you’re considering your options, be aware that not everyone gets the headline rate or 0% balance period advertised. Many transfer deals are offered on an ‘up to’ basis with the card provider deciding what you’re offered and you could also be asked to pay a higher transfer fee or be one of the people who is accepted for a card but asked to pay a slightly higher interest rate.
If you’re not able to snag one of the better deals at this time, you might find that you could still save money by moving balances around on existing cards you already have. Always check balance transfer deals that are open to you through current credit card lenders too.