Guide to balance transfer credit cards
- A balance transfer card could help you to manage and pay down troublesome debt
- Check the transfer fee - does it negate the saving? How long is the low-interest period? Is it enough time to pay off debts?
- You can make a soft search before you apply to see your chances of acceptance
- Missed payments could result in cancellation of any introductory deals you're offered
- Don't assume you'll be able to get a comparable deal when the current one ends
But by comparing balance transfer credit cards and choosing the right deal you could stop paying interest on the debt, saving you money and giving you a chance to clear it.
If you compare credit cards through Gocompare.com you'll be presented with a table showing all available cards.
You'll then be able to narrow down your search and amongst your options will be choosing to see just 0% balance transfer cards and/or low transfer fee cards.
How do balance transfer cards work?
You might be surprised to hear that a card can help you save money, as they're more often associated with spending.
Some of the very best balance transfer cards have an interest-free period of several years.
You usually pay a balance transfer fee in return for moving your debt.
The fee is calculated as a percentage of the debt you're transferring onto the new card and varies from card to card.
So if, for example, you want to transfer £2,000-worth of debt and the balance transfer fee is 3%, it'll cost you £60.
Balance transfer availability and fees
It's become pretty much the norm to be offered a balance transfer facility when you take out a new credit card.
Need more information?
On 2 December, 2014, Gocompare.com analysed 248 credit cards listed on the matrix of independent financial researcher Defaqto and found that 96% accepted a transfer of existing debt.
However, while the vast majority will accept a balance transfer, there was wide variation in introductory balance transfer offer costs.
Just 3% charged no balance transfer fee during the introductory period, while 26% charged a fee of 3% or more.
Lower fees were more common, though, with 41% charging fees ranging from 0.01-2.99% of the transferred balance during the introductory period.
Low-fee balance transfer cards
So if you wanted to transfer £2,000-worth of debt but the balance transfer fee was 0.75%, it would cost you £15.
It's a false economy to go for a card with a lower fee but a shorter interest-free period if you then end up paying interest on your debt again because you haven't paid it all off.
So do your sums and work out how much of your debt you can afford to pay off each month without stretching yourself too much financially.
That should determine the balance transfer card you need, not the fee.
Of course, if it's a straight choice between two cards that have identical 0% periods and other terms but different balance transfer fees, it's likely that you should go for the one with the lower fee.
Interest charged on transferred balances
Just because a card allows a balance transfer, this doesn't necessarily mean it will charge 0% interest on that balance, although many will - of the 248 cards analysed in December 2014, 169 (68%) had an introductory balance transfer rate of 0%.
Things to consider...
- A bad credit rating will restrict your choice of cards
- Consider low-interest cards or loans as possible alternatives to help pay off your debts
- Consider all the terms and conditions associated with the product - the card with the lowest transfer fee will not necessarily be the right one for your needs, and you should think about things like the length of the interest-free (or low-interest) period
Of the cards offering an interest-free period on a transferred balance, 34% were for six months or less and 21% had 24 months or more.
The longest interest-free balance transfer deal available was 34 months.
You might find you can get longer promotional balance transfer deals at a low APR instead of 0% - the card with the longest balance transfer deal listed by Defaqto lasted 36 months, but this wasn't interest free, instead offering a rate of 6.9% for these three years.
If you'll need a long time to pay off your transferred balance, you might find it's more cost effective to pay a low interest rate for longer than to to pay 0% for a few months followed by a much higher rate for the rest of the time you spend repaying.
Is a balance transfer credit card right for you?
If you transfer a balance to a card with a 0% deal then, so long as you clear the debt in time, you could effectively borrow for free. But these products won't be suitable for everyone, so think about how you make repayments.
If you think it'll take you longer to clear the debt, then you could be better off considering a low-interest card instead. If you're struggling to find the discipline to pay more than the minimum each month then you might be better off with a loan that charges a lower rate of interest.
Make a soft search for balance transfer cards
Before applying for a card or loan, it's important to know that the best deals are only available to those with good credit histories and, what's more, failed applications impact negatively on your credit history and make it even less likely that you'll qualify for the top products.
Think about using smart search tools that allow you to conduct a soft search before proceeding with a formal application. Such a soft search for a balance transfer card will show you the cards you're likely to qualify for and won't leave an impact on your credit history.
When you search balance transfer cards with Gocompare.com, you can choose to use the smart search function, which shows you your chances of being accepted before you actually apply.
Downsides to balance transfer cards
With any credit card, you need to use it carefully to get the benefits. If you don't repay the outstanding balance by the time the 0% offer ends, you could find yourself paying a much higher rate of interest.
It's also worth remembering that the very best balance transfer cards are only available to the most reliable borrowers. You may see a card with what looks like a great combination of interest-free period and balance transfer fee, but the law states that only 51% of applicants have to be accepted for the advertised offer so you may find you're in the 49% bracket.
You also need to be careful to always make the minimum repayment. If you're late with a payment one month then you could lose your interest-free offer and be stuck paying a much higher rate until you clear the debt entirely. Because of that, it's a good idea to set up a direct debit for at least the minimum monthly repayment.
Using balance transfer credit cards to spend
If you know you'll also need to use the card for spending then a straight balance transfer card might not be best.
Instead, it's worth comparing cards that are good for both balance transfers and new purchases.
You may get a shorter interest-free period, but you could save money overall.
Remember that you really want to clear the balance before the interest-free period finishes, so don't be tempted into unnecessary spending.
Can you keep switching your debt?
Do you only make the minimum repayments each month?
Debt has to be paid off one way or another, or you'll incur interest
Matt Sanders, Gocompare.com
If so, it might be tempting to consider transferring your balance to a new credit card every time the 0% deal ends.
However, this kind of behaviour (known in the business as being a 'rate tart') is pretty risky.
You can't guarantee that you'll always qualify for a new 0% deal, so you could get stuck on a high rate.
It may be more suited to your situation to choose a balance transfer card with the longest 0% deal possible, and do your best to clear the debt before it ends.
Analysis of balance transfer cards
"With all balance transfer cards you still have to remember that debt is debt," said Gocompare.com's Matt Sanders. "It has to be paid off one way or another, or you'll incur interest.
"Work out what's best for you. If you have a realistic plan in place, think about a lower fee and a shorter period.
"But if it's going to take some time to budget and pay off the debt, go for the longer interest-free period.
FCA analysis of balance transfer cards
In November 2015, the Financial Conduct Authority (FCA) published its interim report into the state of the credit card market, stating that - at the end of 2014 - £14bn was held in balance transfers and 22% of new products involved a balance transfer.
It was found that almost half of accounts repaid the full amount of the balance transferred by the end of the promotional period, a figure that increased to 60% three months later and 71% six months later.
The report considered whether balance transfer products were storing up future debt problems, which may arise once promotional offers expire if consumers are then unable to service the debt or enter into another promotional balance transfer deal.
Taking into account the fact that the most vulnerable customers were unlikely to have been offered balance transfer deals in the first place, the report concluded that "balance transfers do not appear to be materially contributing to problem credit card debt; however, if wider economic conditions were to change significantly then the proportion of consumers unable to pay is likely to increase".
By Felicity Hannah