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There are a number of pros and cons to a balance transfer

Understanding Balance Transfers

Home > Help & Advice > Finance FAQs > Understanding balance transfers

Transferring all or part of a debt from one card to another in order to benefit from reduced rates of interest is called a balance transfer. There are a number of pros and cons to a balance transfer, which are discussed below.

Why Transfer a Balance?

Balance transfers are a really good way to manage credit and, if handled properly, can work a bit like an interest-free loan. If you have a credit card balance on which you are paying a high level of interest, transferring that balance to another card offering zero per cent interest for a set period will potentially save you a considerable amount of money. For those who have the means to completely repay the balance within the offer period, no interest will be payable at all. Those who can’t will pay interest on any remaining balance.

What Do I Need to Consider?

The best balance transfer deals are usually available only for those with exemplary credit scores. However, there are still many competitive offers out there.

Even when an interest-free period has been agreed, a monthly minimum payment will still be required. Failure to make this payment may incur a full interest or penalty charge and could damage your credit rating, even if your intention is to repay in full at the end of the offer period.

Be aware that there is usually a fee for the balance transfer. This is typically about 3 % of the balance being transferred, but rates vary so do shop around before making a commitment. You may be able to find a card with a lower transfer fee, but the 0 % offer period may be a shorter term.

Balance transfer credit cards often have a higher interest rate for purchases. These could even be based on a higher rate than the one applied to the original credit card. Bear this in mind, and if possible avoid using the card for purchases altogether.

Transfer the balance as soon as possible after opening the account or you may lose out on the 0% offer. Card issuers typically limit the switch to within a couple of months of the account starting, so don’t wait.

People who regularly switch credit cards may find that their credit score is affected adversely. Each time you make a balance transfer it will be recorded in your credit record, and lenders don’t like it. Try instead to pay off the balance during the offer period.

One way to ensure the debt is repaid in full by the time the offer ends is to set up a direct debit and divide the balance between the number of months in the offer period. In this way, the debt is repaid in a manageable and predictable manner and there are no concerns about organising another transfer for the remaining balance.

Banking groups do not allow balance transfers to take place between their members. So before setting up a new account, it is important to check on this.

If it is not possible to repay the card balance in full before the end of the offer period, it may be more beneficial to make a final switch rather than incur the higher interest charges which will be applied to the account once the offer ends.

Another alternative could be to take out a loan to clear the balance, which may enable you to take advantage of a lower rate of interest. Secured lending or debt consolidation loans can also be helpful if you have more than one card to pay off or have a big debit balance on your cards.

Once the balance has been paid off, it is a good idea to close the card account. This will remove the temptation to spend on a card that will have a higher rate of interest on purchases. You can then look for another card which offers a more competitive rate.

Warning: Late payment can cause you serious money problems. For help, go to moneyadviceservice.org.uk

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