How do balance transfer credit cards work?

Credit cards are very much a part of British commerce, and, with around 73 per cent of British adults making use of one, they show no signs of slowing down either. In fact, recent data suggests that over 270 million purchases were made on credit card in the month of December 2015, with total spending in the region of £15.4 billion.

Of course, Christmas tends to be a big driver of credit card expenditure, and can often be a time in which card balances tend to balloon. But for those mired in credit card debt and begrudgingly left paying a fortune in interest in each month, there are certain options which can alleviate the burden, and even hasten the path to becoming debt free. One of these is a debt consolidation loan; the benefits of which we’ve analysed previously.

Balance transfers and how they work

However, another popular option among Britons is that of applying for a balance transfer. This involves getting a new credit to pay off the balance owed on the old card(s), usually at a much lower rate of interest. In fact, many offer a brief window in which the APR (a figure which includes fees) is zero per cent.

Clearly, this period of temporary relief presents an excellent opportunity to reduce or entirely demolish the capital balance of outstanding credit card debt, and thus save hundreds (or thousands) of pounds in interest as a result. But while it may seem like a no brainer to go down this route, there are a few things to consider first.

Credit score: The good deals on balance transfers which you may have seen advertised often have fairly strict eligibility criteria, and only those with decent credit scores tend to be approved. It may thus be worth your while to take some steps to enhance your credit file first.

Don’t apply for too many: In reference to the above point, it’s important to note that applying (and being declined) for multiple credit cards in a short space of time leaves a footprint on your credit file as it could demonstrate excessive credit hungriness. It is thus worth being a bit selective about where you apply, and once again ensuring that your credit score is optimised.

Be honest with yourself: Will you genuinely be able to keep up the repayments, and service your debt effectively during the window of zero (or low) interest with the new credit card? Or are you simply kicking the can forward until the rate rockets back up again, leaving you in the same position again in a few months’ time? Be sure that you’re doing this for the right reasons, and that you’re going to make it count.

The fine print: Tucked away in the terms and conditions are exclusions for the special rate of interest, usually pertaining to late, missed or insufficient payments, and Brits are having to cough up around £1.2 billion in unnecessary interest each year as a result of mistakes relating to balance transfers on credit cards. Be sure that you fully understand what you’re signing up to.

What if I’m stuck with a poor credit score?

If you know that your credit score is poor, and you feel that you won’t be able to improve it significantly anytime soon, you might do more harm than good by trying to apply for balance transfer cards (and/or debt consolidation loans).

However, there are other things you can do, especially if you already have multiple credit cards. You could do what’s called a credit card shuffle, whereby you get in touch with one of these existing card companies and ask whether they’d be willing to offer you a lower rate of interest if you transfer the balances across from the other cards onto it (provided your limit allows for this).

Alternatively, it makes good economic sense to simply transfer as much of your credit debt as you can onto the card(s) which offers the cheapest rate, and make the most of the limits on these. You should then take a top-down approach from there, and focus all your energies on paying off the highest-interest cards as soon as possible – even if it means only making minimum payments on the others.

Applying for your balance transfer

If your credit score is optimised, and you think you’re ready to take control of your credit card debt with a balance transfer, then it’s probably time to start shopping around to find the best deals! The likes of Virgin, Tesco, Halifax, Barclaycard, MBNA and numerous others are all currently offering 0% cards for in excess of three years, which is a good place to start. You can usually make use of eligibility calculators to help you determine the likelihood of being approved beforehand, without hurting your credit score. Though beware of terms like ‘up to’ in the various advertisements, as this could mean you don’t actually end up getting the headline rate or APR.

But all in all, balance transfers can be a force for tremendous good if you’re bogged down by credit card debt. What’s important is to take into account all the pertinent factors involved, and decide what the best plan of attack is for you. Hopefully the reward at the end of it will be debt freedom.

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