According to the Bank of England, credit card borrowing in the U.K. is rising at its fastest annual rate in 17 years, with consumers borrowing an additional £0.7 billion on their credit cards in April this year alone.
This means more households are going into debt to make ends meet.
But with more debt unfortunately comes more responsibility and in some cases, it’s simply too much for households to handle and they go deeper into debt. This is when alternative debt solutions are worth considering, and one of these is applying for a balance transfer credit card.
A balance transfer credit card is a card specifically designed to carry a balance brought from another card or multiple cards. These balance transfer credit cards typically have very low-interest rates on the transferred debt for a specific time, usually 12 or 18 months.
With a balance transfer credit card, you can manage your debt across multiple cards. Depending on your credit history, you can also get a competitive deal with 0% interest on the transferred balance.
Let’s take a closer look at how balance transfer cards work and what to look out for when transferring balances from one card to another.
Credit card balance transfers are when you transfer debt from one card to another. The old card's balance is paid off on the new card, so you effectively swap the card you have to make repayments on.
Most balance transfer cards will typically offer an interest-free introductory period where you’ll pay low or even no interest on transferred balances.
This introductory deal can last up to 12 months or more.
If you have debt on a credit card with a high-interest rate, transferring it to a single card with a lower interest rate can save you money. It can become challenging to keep up with high-interest payments, especially if you have multiple credit cards to pay.
By transferring their balances to one card, you will have only one payment to make every month, with a lower interest rate.
Credit cards may charge a once-off fee for a balance transfer, which is typically a percentage of the balance.
This is often in the 2%-3% range for most cards.
At the end of the promotional interest-free period, the standard interest rate typically jumps to a higher annual percentage rate (APR), so if you can’t clear the credit card balance on time by the end of that term, you may end up paying interest on the debt again.
You may then look for another balance transfer option if you're eligible.
This depends on your circumstances and income, so the best thing to do is to use an eligibility checker to see what type of promotional offers you may get and the credit score requirements associated with them.
Here’s how a balance transfer works:
You’ve got £1,000 outstanding debt on your credit card with an interest rate of 18%.
You transfer the debt to a new balance transfer credit card that offers 0% interest for 12 months with a once-off fee of £30 (3% of the transferred balance).
You’ll need to pay £86 monthly to clear the balance within 12 months. But the real savings are in the interest; you’ll save £150 even with the £30 fee.
Here are a few things to look for when transferring an outstanding balance to a new credit card.
Work out how long you’ll need to pay off the balance on the card. You can do this by dividing the remaining balance by the amount you can afford every month. E.g. you have a £1,000 debt and can afford £100 a month, it will take you ten months to clear the balance, assuming there is no interest to pay.
Compare offers for the best deals. Compare cards to find the best balance transfer deals for your needs. Look for cards that offer a 0% APR introductory balance transfer period that is long enough for you to clear your current balance. Look at the transfer fees (if any) and whether pre-qualifying for the card will hurt your credit score.
Compare the balance transfer fees. Most balance transfer cards come with a transfer fee, especially those that offer a 0% APR. This is a percentage of the amount you transfer, typically between 2% and 3%.
A 0% APR balance transfer is when you transfer high-interest debt from one credit card to another that offers a 0% APR for a specific period. The best 0% APR card deals offer introductory periods that last up to 24 months, and some can go up to 36 months, but there are a few things to look out for.
You may need to pay a one-off balance transfer fee, which is a percentage of your transfer balance.
You should only use this card to pay off your debt balance as fast as possible. If you use these cards for any other purchases, you may find yourself with high-interest charges. Try and clear your debt first and then see what interest rate you are offered on the card.
Balance transfer cards offer an affordable way to manage your debt, but they can also affect your credit score. Here are some things to keep in mind:
Don’t make too many applications. Making multiple credit card applications in a short time can be bad for your credit score as each potential lender will run a credit check. If you already have an application going through, don't rush to make more with other lenders.
The age of your accounts. Lenders prefer long-standing accounts, so if you have a new credit card on your account, it may cause your credit score to take a dip - but this will only be temporary. It may be worthwhile to keep older accounts open for a while to boost your credit score.
Reducing your debt. Remember that a 0 balance transfer can help you reduce your balance quicker, meaning you’ll be less likely to skip payments and go into debt. This will increase your credit score in the long term.
Some cards come with balance transfer fees, a percentage of the debt you transfer to the card. These fees are typically around 2% to 3%. For example, if you transfer a £2,000 debt to a balance transfer card, then a fee of 3% would mean £60.
Some cards charge lower fees, while others have shorter introductory periods.
Most credit card providers require that you transfer 90% to 95% of your credit card debt to your card. For example, Chase allows you to transfer only up to $15,000 to your cards within a 30-day period.
This is to avoid you having debts on multiple cards and spreading yourself too thin, resulting in you being unable to afford all the monthly payments and ending up deeper in debt.
Two main advantages to taking up a balance transfer credit card offer exist.
Reduce your debt as fast as possible. With a balance transfer card, you can pay off your outstanding debt balance faster by paying low or no interest every month.
Consolidate your debt. You can transfer debts from multiple cards to one card and pay one monthly payment to reduce all your debt. It’s easier to manage your finances too.
When you’ve moved your debt to a balance transfer card, you may wonder if you should close the account or use the card to purchase again.
While the sensible thing would be to close the card and avoid additional spending, closing your old cards immediately might harm your credit score. This is because it increases your debt-to-credit ratio.
Before you transfer a balance to a new card, consider the following:
Many top balance transfer cards are designed for cardholders with high credit scores (around 670 to 850), but there are cards available if you have a lower credit rating than this.
Your credit history is important to negotiate a good balance transfer rate. Look at your credit profile and ensure there aren't any negative aspects like default payments, incorrect contact details, or even County Court Judgements.
Most credit card companies will charge a one-off transfer fee of up to 3% of the balance you transfer. Factor this in when working out whether you want to move your debt balance to a new card.
Most banks will have an intro APR to entice you into taking out a card with them. Taking advantage of a 0% interest period can help a great deal to save even more. You'll save on interest charges if you can pay off your debt before this intro period ends.
Not all balance transfers are immediate. In most cases, a balance transfer to a new card can take up to seven working days (but it depends on the provider).
Remember that, as with all credit cards, ensure you make the minimum payment each month and avoid exceeding your credit limit. Also, remember that the balance you transfer on your new card will count towards your new credit limit.