Balance Transfer credit cards can be a useful way to help clear debts. But there are dangers with using one if you don’t follow the rules.
This Be Clever Basics guide is going to explain how 0% Balance Transfer cards work so you can find out out if one is right for you.
What is a 0% balance transfer credit card?
Got credit cards debts? Chances are you’re paying close to 20% in interest on the money you’ve borrowed. This adds up quickly, making your spending more expensive. And if you’re spending on credit cards in the first place it’s probably because you can’t afford what you’re buying – so extra charges aren’t welcome!
But if you get a 0% balance transfer card, you can move the debt from other credit cards to it, and crucially not have to pay interest for an agreed time. At the moment this can be as long as 37 months – that’s just over three years.
The idea is that you use this time to clear the debt without adding to it, saving you money in the long run. If you’ve other debts, it might also give you a little breather while you clear those.
What to watch out for with 0% balance transfer cards
The 0% time will end
Once the 0% offer period ends, the interest rate goes up to a normal – if not higher than normal – one. So the idea is to use that 0% time to clear the debt.
There’s often a fee
You will usually have to pay a fee on the total balance you move over. So a 3% fee on a £3,000 balance transfer would be £90.
You still need to make a monthly payment
If you don’t make the minimum repayment each month, the special 0% deal could be ended early, meaning you’ll start paying high interest again.
You might not get the advertised deal
Credit card companies want to make money from you, but they also want to be sure they won’t lose money on you. So you’ll be credit checked before they decide whether to accept you or not.
Obviously there’s a risk you could be rejected. Bad for your debt and bad for your credit rating. To get an idea of whether you’ll be accepted, try Money Saving Expert’s credit card eligibility checker. It’ll look at your credit rating but not leave a trace.
If you do get accepted, you might not get the full deal either. You could be offered a shorter 0% deal or lower credit limit (i.e. the amount you can have on the card).
They aren’t the answer if you don’t think you can clear the debt over time
If your only debt is the card debt, balance transfer cards are a big help. But if your wider finances are in a bad shape and you don’t think even a year or more on a 0% card will help you clear your debts, then you’re just delaying a bigger problem. Really you need to get some free debt advice.
How to make a 0% balance transfer card work for you
Plan for how to pay off the debt
Say you’ve got a £1,000 debt and you transfer it to a 25 month 0% deal, you should try to evenly pay it off each month. That would be £40 every month.
Or even better, pay as much as you can afford each month to clear it sooner. Even though you’re not paying interest on the debt during the 0% period, you don’t know if something could happen later than stops you paying your planned amount.
Decide if a longer deal or lower fee is better
Don’t go for a long balance transfer deal if you don’t need it. Instead you might be better picking one with a low fee – or even one that is fee-free.
Of course the lower the fee, the shorter the deal, so the best bet for you really depends on your circumstances. If you need a long time to pay off the debt, a longer deal could suit you, even if the transfer fee is higher.
I’m often getting junk mail through the post from my existing banks offering a balance transfer deal. These might be decent, but don’t just jump at the first one you see. Shop around and see what the best offer is out there.
Try not to keep moving the debt
Some people transfer the debt to a new 0% card each time the deal ends. And again. And again.
It’s potentially risky as you might get rejected for a new card. Plus since you generally have to pay a fee each time you transfer, it could cost too.
If you think you won’t be able to clear the debt, consider a longer 0% period for the card.
Don’t spend on your balance transfer card
New spending doesn’t just add to the previously transferred balance. It’s a new debt so interest won’t be 0%. So to avoid this look for a better spending card. If it has to be a credit card, then you can get a 0% purchase credit card which does the same thing but for new spending, or an all-rounder which has 0% on transfers and purchases.
If you do spend on a balance transfer card, try to clear that full amount at the next billing date. The most expensive debt is cleared first, so any monthly payments you make will go to clearing this new spend first. But if you don’t pay off enough to cover the new spending, you’ll get charged interest on it.