Owing money on a credit card can be an expensive business! High interest rates can easily push the borrowers into unmanageable debt. This is where balance transfers could come into play. They can help clear debt in more ways than one.
What is a balance transfer?
If you take the balance of one debt and transfer it to another account, you’re doing a ‘balance transfer’. The main reasons you’d want to do this are:
- To pay a lower rate of interest on your debt
- To bring all your debts under one roof to make them easier to manage
What is a balance transfer on a credit card?
Shifting your balance from one credit card to another is where you’re most likely to use a balance transfer. It’s an easy way to avoid paying high interest rates on your credit card. Some cards offer 0% on your balance transfer for a limited time which can really help you get on top of your debts.
Be aware that, although you may be offered a low or 0% interest rate, the transfer might not be free. You could be charged a transfer fee. This is usually a percentage of the balance you’re transferring.
How does a balance transfer work?
1. The first step is to take out a credit card that offers a lower interest than your existing one:
It’s best if you can take out a card that offers 0% interest. If you don’t qualify for a 0% balance transfer card, the next best thing is to go for one that has a lower rate than the one you’re already paying.
2. Do the balance transfer:
When you go through your new credit card application, they may ask for the balances you want to transfer. If they do, they’ll do the transfer for you once they approve your application. If they don’t, you should be able to easily make the balance transfer yourself.
3. Stop using your old credit card:
Just because you’ve reduced your balance on your old credit card to £0, doesn’t mean you should spend on it again! The reason for doing a balance transfer is to pay off your debt, not to get into more of it.
4. Make a note of when the low interest rate on the new credit card ends:
Remember that when the special rate you’ve got on your new card ends, the interest rate will be hiked up. Have a plan of what you’re going to do when this happens. Either:
- Clear your debt before the low interest rate period end. You can do this by setting a Direct Debit to repay the balance over the interest free period
- When the low rate ends, move your balance to another low interest rate offer on another card
What are the pros and cons of a balance transfer?
| Pros of doing a balance transfer | Cons of doing a balance transfer |
| All your debts can be brought into one place when you transfer them all onto one credit card. | When you do a balance transfer, a fee will be charged. This can be added to your debt. |
| Paying less interest means you save money. | If you miss one of your payments during the low rate period, the low interest rate could be removed. |
| Paying less interest means you can pay off your debt faster. | The interest rate will go up once the low rate period ends. |
| Repaying your new card on time can help your credit score. And by not using your old credit card, you show that you’re in control of your money as you’re not using all your available credit. | Having cleared your existing credit card, it’s easy to start spending on it again. This’ll get you into even more debt. |
Why is a balance transfer useful for me?
A balance transfer could be useful for you because it can help you to manage your debts. By moving your balance onto a card with little or no interest, you can pay down your debt faster.
A balance transfer is also useful for bringing all your debts into one account. It makes it easier to manage when you’ve got just one account to pay instead of 2 or 3.
How much money can I save with a balance transfer?
You can save money with a balance transfer, but how much depends on two things.
1. The balance transfer fee
If the balance transfer fee is high, it may not be worth doing the transfer. For example, let’s say your transfer fee is 10%. If the interest on your existing card is 10%, then it’s not worth doing. In this case, a balance transfer won’t save you any money.
2. The difference in the interest rates between the old credit card and the new one
The interest rate on the new card may not be 0%. If it’s just a lower interest rate, you’ll have to work out if it’s worth transferring your balance. Once you add the transfer fee it might not be any cheaper than what you’re already paying.
What should I consider before applying for a balance transfer?
There are a few things to consider before applying for a balance transfer.
1. How long will the low interest rate last on the balance transfer?
The lower interest rate you’re offered on the new card won’t stay at that rate forever. You need to make sure you know how long it’ll last. As soon as the low rate period ends, the interest rate will jump up.
Balance transfer credit card companies offer low interest rates for different lengths of time. It’s worth shopping around to get the balance transfer card that suits you.
2. Can you afford to pay off your balance during the low rate period?
Clearing your debt is the best thing to do. While you’ve got less interest to pay, more of your money is going towards reducing your debt. That’s why it’s a good idea to pay off as much of your balance as you can during the low interest period.
3. What is the balance transfer fee?
You don’t want the balance transfer fee to be more than the interest on your existing card. Find out what the fee is before you apply for the new credit card. The balance transfer fee will be a percentage of the balance you’re transferring.
4. What if the credit limit on your new card isn’t high enough?
If the credit limit on your new card isn’t enough to transfer all your existing balance, you have options.
- Apply for another credit card to transfer the remaining balance onto it
- Pay off what’s left on your old credit card by finding ways to make some extra cash
How do I choose the right balance transfer for me?
To choose the right balance transfer for you, choose the credit card company who you’re eligible to apply with. Most credit card companies will let you do an eligibility check before you apply. This tells you how likely it is that your application will be approved.
You can also find out which credit cards you’re most likely to be accepted for by searching for such websites online on search engines like Google. Once you know which cards you can choose from, pick the one with the best balance transfer deal.
What different types of balance transfer are there?
There are two main types of balance transfer – long or short. The length of time you get the low interest rate on your balance transfer decides whether it’s long or short.
1. A long balance transfer
If you have a long balance transfer, you’ll get the low interest rate over a long period. With some credit cards this can be for 30 months. This is helpful as it gives you more time to pay back your debt. The only thing to watch out for are the transfer fees. These tend to be higher on long balance transfers.
2. A short balance transfer
If you have a short balance transfer, you’ll only have the low interest rate for a short period. This is a good option if you’ve got a small balance to transfer and can pay it back quickly. Short balance transfers tend to have lower transfer fees.
How do I do a balance transfer?
Doing a balance transfer is easy to do.
- Find out what the balance is on the card you want to clear. Then work out how much you can afford to pay back each month. That way you’ll have an idea of which balance transfer card suits you best.
- Check which balance transfer credit cards you’re eligible to apply for. Choose the one with the best terms for you.
- When you apply for your new card, the credit card company may do the transfer for you. You just have to give them the details of your existing card. Otherwise, the new card will give you clear instructions on how to transfer your balance.
How can I make the most out of a balance transfer?
You can make the most out of a balance transfer by following these tips.
- Put a reminder in your calendar just before the low interest rate is going to end. That way you know when you have to move your balance again.
- Make all your monthly payments on the new card when they’re due. If you miss any, you may lose the low interest rate.
- If you can, pay off everything you owe before the interest rate goes back up.
- Some balance transfer cards also offer 0% interest on any purchases you make. If you have a card that gives you this offer, check how long they offer it for. The low rate period on purchases may not be the same as the low rate period on your balance transfer.
What alternatives to balance transfers are there?
A balance transfer isn’t your only option for paying off your credit card. There are other options you can try.
1. You can take out a personal loan
If you want to find a way of paying less interest, personal loans are an option. But the interest rate you’re offered on a loan depends on your credit score. If you haven’t got a very good credit rating, you may be better off keeping your credit card debt where it is.
If you can get a better rate on a personal loan, it’ll help you manage your repayments. That’s because the monthly payments are fixed at the same amount. This makes it easier to budget and you know how many payments you have to make until it’s paid off.
2. You can settle your credit card
Using your savings to clear your debts is worth doing. You’re likely to find that the interest your savings earn is less that the interest you’re paying on your credit card.
You could try offering the credit card company an amount that’s a bit lower than your balance. But if they accept your offer and close your account, it’ll show up on your credit file. This’ll have an impact on your credit score, so only do this as a last resort.
3. Get some advice on how to deal with your debt
It’s easy to get into too much credit card debt. If that’s happened to you and you can’t keep on top of your repayments, get help. There are agencies in the UK, that’ll give you advice for free. Here are a few for you to try.
FAQs – Balance transfers
How long does it take for the balance to transfer?
Balance transfers are pretty quick, they usually complete within a couple of days. If you’ve done a balance transfer and it hasn’t gone through after 10 working days, get in touch with your lender. While you’re waiting for the transfer to happen, keep up your payments on your old credit card.
Is a balance transfer available on my credit card?
You’ll need to check with your credit card company to find out if a balance transfer is available on it. You’re more likely to be offered a balance transfer on your existing card if you:
1. Owe below your credit limit
2. Manage your repayments well
3. Don’t want to transfer balances between cards that are both with the same bank
How much money can I transfer?
You’ll only be able to transfer balances up to your credit limit. Some credit cards companies won’t let you transfer more than 90% of your credit limit, so check this first. The minimum amount you can transfer is around £100.
Does transferring a balance from my credit card affect my credit score?
Transferring a balance from your credit card won’t affect your credit score. But when you apply for a new credit card, your application will show up on your credit file. This’ll have an effect on your credit score so apply for one you’ve got a good chance of being approved on.
Does Drafty give you a credit card?
No, Drafty doesn’t give you a credit card but we do give you a line of credit. The difference is that instead of having a card, we transfer the cash to your bank when you need it once approved for a credit line. Find out more about our line of credit here.
Disclaimer: The content in this article is for information purpose only. Please check with your respective bank before doing a balance transfer. Any external links which are linked in this article are for reference only. We are not affiliated to any of the external parties linked here.
