What is a balance transfer card?

You may have always thought of credit cards as being a great addition to your wallet or purse when you need purchase an item of high value, or in an emergency. However, spending is not the only thing credit cards are used for, they can also help with paying off debts cost-effectively.

Balance transfer credit cards are specifically designed to make clearing certain debts more straightforward and, usually, cheaper. So what exactly are they? Read our guide to learn more.

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"A balance transfer card is designed to let you consolidate several different debts."

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Balance transfer cards - what's the deal?

A balance transfer card is designed to let you consolidate several different debts, by transferring the balances on to just one card, as the name suggests. Typically, the unsecured debts you can transfer to a card like this are from other credit cards, store cards and overdrafts.

Once you have secured your new card, you can transfer the total balance remaining on your other cards, or your overdraft (not all balance transfer cards will allow you to do this), on to it. Then you can pay off the balance in monthly instalments, just as you would your regular credit card. However, because you only have this one bill to pay, rather than the several you were paying, it can make managing your finances easier.

Some balance transfer cards allow you to spend as well as transfer balances, so this might be an option if you’re keen on both features. Just take care that your spending doesn’t make your monthly bill unmanageable.

Is it for me?

If you have several store cards, credit cards and an overdraft and you’re worried about losing track and starting to miss payments because of the confusion, a balance transfer card could well be a good option for you. Unlike other debt management options, a balance transfer card is best suited to customers who haven’t yet started defaulting on their borrowing, but who could be at risk of this because of the difficulty of managing several different forms of credit.

This means that you should expect to go through the same process as you’d go through for a credit card that you plan to use for spending only. Your credit rating will be taken into account when you apply, as will other details like your income. If your credit rating has already been impacted by missed payments, a different option – like a debt management plan – might be more suitable for you.

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"Many balance transfer cards come with low interest rates – at least as an introductory offer."

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What does it cost me?

Many balance transfer cards come with low interest rates – at least as an introductory offer. If you currently have one credit card, one store card and an overdraft, you may find the interest alone you are paying on all of these adds up to a sizeable sum. By shifting the balances on to a single balance transfer card, with a lower rate of interest, you could reduce the amount of interest you’re paying significantly.

Perhaps the most popular are those with 0% interest attached. This is because, providing you keep up with your repayments, you will pay absolutely no interest while the deal is ongoing – that’s right; nothing. It’s therefore worth making the effort to clear as much of your balance as possible before the 0% window closes, so you save as much on interest as you can. When that window is near to closing, some people choose to shift any balance left at the end of the 0% period, on to a new card with a 0% interest rate. But this can be risky, as you may not be accepted.

If all of that sounds too good to be true, keep in mind that many of these cards come with a transfer fee. When you are working out whether a balance transfer card is a cheaper option for you than continuing to pay off your balances separately, you should remember to include this fee in your calculations. You should also take note of what the interest will rise to once the introductory offer has come to an end, in case you’re still repaying it.

Where to take care

As with any form of borrowing, it’s important to stay on top of your repayments and pay at least the agreed minimum, or your credit rating could be affected. This could make it difficult for you to borrow in the future, and may even result in you incurring penalties and charges from your lender. Your lender may also decide to end the low interest rate offer you’ve been enjoying early.

A good way to keep on top of your repayments is to work out how much you need to pay each month to clear the balance by the end of the low interest period and then set up a Direct Debit for this amount – or as close to this as you can afford. This way you don’t even have to think about it.

Another thing to be wary of when taking out a balance transfer card is spending. Once you have shifted the balances from your other cards on to this one, it may be all too tempting to start spending on them again. However, this will mean you’re adding to your debt and you could end up in the same situation you were trying to get out of, with too many lines of active credit that you find difficult to manage.

Remember, because you have transferred lots of small balances to your new card, the amount you need to pay back each month will be more than these were on their own. And because you’re paying back a larger sum, it could take you longer to clear the balance than it would have if you had stuck to your original repayment agreement.

If you still have an outstanding balance once your card’s low interest rate ends, it is an option to take out a new balance transfer card. However, keep in mind that lenders can be wary of borrowers who make lots of applications for credit close together, or who regularly switch to new cards, as it can look like desperation. Instead, shop around to find the card that is most suitable for your needs and that you are most likely to be accepted for, so that you can cut down on the number of deals you apply for.

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