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YourMoney guide to balance transfer credit cards

Paloma Kubiak
Written By:
Paloma Kubiak

Transferring your debt from one or more credit cards to a new card can save you a lot of money – but only if you understand the rules and stick to them.

Moving your balance from one or multiple credit cards to another card is known as a balance transfer (click the HSBC infographic to expand for more information).

The new card provider pays off your old credit card debts, up to an agreed limit, transferring the debt to your new card.

Your new balance transfer credit card will typically come with an interest-free period. If you pay your balance down within this timeframe, you will not pay any interest on your debt.

Balance transfers are a good way of paying off your credit card debt cheaply, but only if you stick to the rules.

Credit cards can be a convenient way to pay for your everyday shopping and luxuries such as holidays. They also offer valuable consumer protection that can help you get a refund if you buy an item that does not work or fails to arrive.

However, if you do not pay off your debt in full every month, the interest rate charged on the outstanding balance can range from around 20% to 35%.

A balance transfer may be suitable for you if you are unable to clear your credit card debt every month. Or you may have multiple credit card balances that you want to consolidate into one convenient monthly payment.

Choosing and using your card

There are lots of balance transfer credit cards to choose from that come with interest-free periods of different lengths.

Which one you choose depends on how quickly you can afford to repay your balance.

When comparing cards, a good place to start is by comparing the length of the interest-free terms available and the fees the card provider charges you to transfer your debt.

Some providers do not charge a fee but give you a shorter time to pay off the balance, for example 15 to 18 months.

To get more time to pay back the debt, you can opt for a term of around two to two and half years and pay a fee of between 1.5% and 3% of the balance. Some cards come with a fixed monthly fee instead. It makes sense to spend some time calculating which is the cheapest for you.

Take the following example. You are transferring a balance of £2,000 which you plan to repay over 24 months. If the credit card provider charges a fixed monthly fee of £3.00 the transfer would cost you £72.00 in total (3 x 24). If you chose a card with a fee of 1.5% of the balance, you would be charged a flat £30.00. The fee is added on to your balance when the card is opened.

Some card providers also charge an annual fee, so always read the small print when comparing rates.

How much can I borrow?

The level of debt you can consolidate on to your new balance transfer credit card will depend on your new card’s credit limit, minus the fee for switching. The limit is determined by assessing your income and credit score, which means you may not be able to consolidate all your cards into one balance.

You may not be eligible for the full interest-free period advertised by the credit card company. Watch out for the phrase ‘up to’ when providers advertise their interest-free offers. Only those with the highest credit scores will qualify for the full interest-free period.

If you have experienced payment difficulties in the past which have affected your credit score, you can still apply for a balance transfer, but ‘credit repair’ cards often come with a much shorter interest-free period and a higher follow-on interest rate.

Be careful when shopping around for a balance transfer deal, as you don’t want to damage your credit score.

When you make an application, the credit card company will check your credit file to decide if they want to lend to you. They leave behind what is known as a ‘footprint’, which means other lenders can see you tried to apply for a credit card, and it can temporarily lower your credit score. But don’t worry, a well-managed credit card can help you to boost your credit score in the long-term.

You can also use an eligibility checker to see your chances of getting a credit card without it leaving a mark on your credit report.

Calculating repayments

Divide your balance by the number of interest-free months on your balance transfer credit card to work out how much you need to repay every month.

Do not use the provider’s minimum payment as a guide to how much you should pay back. This tends to be calculated as 5% of the balance and is not tailored to your circumstances.

However, if your personal repayment plan falls below the minimum payment set by the provider, you must increase it to fulfil the requirements of your terms and conditions.

If you can afford to pay back more each month, you will pay off your balance quicker.

Setting up a direct debit with your balance transfer credit card provider will ensure you never miss a payment. Missing a payment could affect your entitlement to an interest-free period and damage your credit score.

Setting rules

Always pay back your balance within the interest-free period. If you don’t, you risk forfeiting the savings you have made.

Current interest rates on balance transfer credit cards, following the end of an introductory period, range from around 20% to 35%.

On a balance of £2,000, if your annual percentage rate is 20% you would be charged £33 in interest every month.

Never use your balance transfer credit card to buy things with, unless it also comes with a 0% deal for purchases which runs for the same amount of time as the 0% balance transfer period. Most don’t, and you will be charged a high rate of interest.

And never use any credit card to make cash withdrawals if you can help it. Cash withdrawals will show up on your credit record and lenders may assume that you have trouble managing your finances.

Further considerations

Ask your new credit card provider If you need any help setting up the right repayment plan to clear your credit card balance in time.

To avoid the temptation of using your balance transfer card for purchases, keep it somewhere safe at home, or consider freezing it in ice!

Don’t be too hasty and cancel your old direct debit before the balance transfer has been completed. You are still responsible for making payments until the balance is nil.

Once the debt has been cleared remember to close your old credit card accounts. Having too much available credit can affect your chances of obtaining future loans and mortgages.