Balance Transfer Credit Cards
Credit cards are a great way to maximise your cash flow, get a quick burst of credit for something you need in an instant or just as a part of a general budgeting and finance management plan.
With different credit cards offering offers on the way they are used, it is easy to get caught up in a flurry of 0% interest on purchases or similar deals, only to forget about the downsides. As time passes, the credit card deals that were great a year ago start to wane and you find yourself paying huge levels of interest on a balance that has become a little out of hand.
Badly managed, a card with £1,000 used on it can find itself costing you £50 per month in interest – money that there is no need for you to pay out. This is where balance transfer cards come in.
For a small fee (sometimes as small as nothing!) a balance transfer will take the debt from one credit card and hold it at 0% interest for a set period – often more than two years, giving you the breathing space to pay it off in a structured manner and also release the weight from the other card giving you your cashflow back.
How does a balance transfer card work?
For most purposes, a balance transfer card is no different to any other credit card you have owned – you can use it for purchases in a normal way and pay the interest rate on those purchases that is set on the card. However, when you get a new balance transfer card you can move the existing debt from a different card onto it, where it resides at 0% until paid off or the term ends.
Your original card is now ‘empty’ and able to be used as normal, while the new balance transfer card holds the debt.
Clearing a balance transfer credit card in time – how should I pay off the balance?
The reason for getting the balance transfer card was to avoid interest payments, a futile exercise if you then fail to pay off the debt in charge and end up paying interest on it.
It is important to pay off the balance before the interest free period is up. The best way to do this is to take the value of the balance, add any transfer fee, divide the total by the number of months of interest free term and pay that amount (or more) from the card each month.
For example, a card with 27 months interest free balance transfer taking on a debt of £2,000 with a 3% transfer fee would have an opening balance of £2,060 and require £76.30 to be paid off per month to clear it.
Of course, it is always better if you can clear it early, but don’t just relax and cover the minimum payment – doing that leads to more interest and debt later. Be firm with your repayments and use the extra time you have been given to properly manage the debt.
Can I use a second balance transfer card to deal with any unpaid balance on the first?
If you are stuck at the end of the term with a remaining balance, then it makes sense to run through the sequence again, getting a second balance transfer credit card to free up the first.
Be wary of becoming dependant on this sequence as it is easy to pull yourself into more debt. If you are going to move balance onto a second card, it is advisable to cancel (and cut up!) the first once it is clear. The interest rate on purchases is unlikely to be good enough to want to use it as your main card and running up further debt on it is going to be detrimental.
Can I make purchases on my balance transfer card? What happens with interest?
If you have a transferred balance (at 0%), and then you make a purchase (with an attached interest rate) and you make a payment, what happens?
This gets a little complicated!
Any minimum payment that you make on the card can go to pay off any part of the balance, any excess will go to lower the balance of the highest interest items.
The transferred balance of the card (at 0%) stands at £1,053.
A purchase is made of £190.
The card balance now stands at £1,243.
The statement shows minimum payment is £43.
If the minimum payment is made, then the credit card company can choose to take that from the 0% (transferred) balance, leaving that at £1,013 and then apply interest on the full £190 from the purchase.
If £100 is paid, then £43 will be applied to the 0% balance (leaving the £1,010) and the remaining £57 will come off the £190 purchase balance, meaning £133 remains and will have interest added.
In order to clear the purchase balance, a total of £233 must be paid that month, covering the minimum payment to come of the 0%, and a full £190 remaining to clear the purchase balance. There will be no interest added.
This example shows that while you can use the credit card for normal purchases through its life, doing so will seriously impede your ability to clear your debt. For this reason, we advise against making purchases on a balance transfer card.
How do balance transfer cards affect my credit score?
As you are no doubt aware, applying for a credit card has a negative impact on your credit score. In this way, by applying for a balance transfer card, you immediately lose a few points on your rating.
Another negative impact to your credit score is the amount of credit you already have available to you. By adding the credit from an additional card, you increase that value and thus lose a few more points.
With a sensible repayment plan, however, you will lower the interest paid on your cards, lower the balance on them and show good money management – all gaining points on your credit score.
In the long term, the gains from a well-managed balance transfer card exceed the initial impact of applying and getting the card.
Can I use my original credit card for purchases?
Once you have transferred the balance away from your original credit card then it becomes free to use for purchases once more. This is both good (as you have access to some credit) and bad (as it is likely that you will slip into temptation and use up that credit).
Only you know whether keeping onto that original card is a good or bad idea for you. If you are able to properly budget and manage your money, then there is no harm in keeping the card – perhaps you put it aside for emergency use only. If, however, you know that the temptation to spend will be too great then you should close that account and concentrate on paying back the transferred balance.