3.1 What are 0% balance transfer credit cards?

A.k.a.

• Balance transfer credit cards
• Interest free credit cards
• Low rate credit cards
• 0% credit cards

Why balance transfer?

If you have existing credit card debt you may want to move it over to a balance transfer credit card with a 0% balance transfer offer.

A balance transfer credit card generally offers borrowers a substantial interest-free period on an amount moved to that card from another credit card. The 0% interest offers available range from 6 months to 15 months and can offer substantial savings to cardholders who are fed up with seeing their monthly payments being consumed by interest costs.

This credit card would therefore be the ‘cheapest’ option for any cardholder who is currently paying standard interest charges, of around 15% APR, on their credit card balances.

Balance transfers used to be a free service offered by credit card companies as a way of attracting new custom. However, credit card companies now charge a fee when you balance transfer to one of their cards. The standard fee is usually between 2.5% and 3.0% of the amount you wish to transfer with a minimum fee payable which is set by each individual credit card company. Some credit card companies are happy for this fee to be added to your overall credit card balance but some make you pay the fee up front.

Consolidating debts

If you need to consolidate your existing credit card debts, you may well benefit from a balance transfer credit card. If you have two credit cards, each with outstanding balances, and you transfer them over to one card with a 0% balance transfer offer, not only will you benefit from not paying interest for around 12 months but you will also lower your minimum monthly repayments. This in turn will mean that every pound you pay off on your credit card for those 12 months will go towards clearing your debt, providing you haven’t used the card for anything else. You will therefore clear your debt sooner and pay less interest in the process.

The provider offering your new 0% balance transfer credit card will not stipulate that you have to transfer all of your existing debt to your new card. The amount you can transfer will depend on the credit limit given to you with the balance transfer credit card. The interest-free period will of course be reason enough to move as much of the debt as you can from the interest charging card to the 0% interest card.

However, it is worth bearing in mind what the minimum payments will be for the new card and how much interest you will pay after the balance transfer offer ends based on the standard APR charged on the card.

Risks of constantly switching cards

Some people choose to switch to another balance transfer credit card at the end of their existing balance transfer offer. These people need to remember when their existing 0% offer ends so that they can arrange the new balance transfer before they start paying standard interest on their debt.

These people will end up paying a balance transfer fee each time they switch credit cards and run the risk of reducing their credit score if they don’t close down each credit card after they transfer their balance from it. If one person has many credit cards in their name then the amount of credit they have at their disposal could prove to be a deterrent for future lenders. This is because the person will present as a bigger risk, which is not good at a time when lenders are tightening their lending criteria. Also, having many credit card accounts open could prove tempting and eventually confusing for the cardholder.

Parent companies

Another thing to consider is that several different credit cards are often run by one big ‘parent’ company; for example, the Royal Bank of Scotland (RBS) run the NatWest and Mint credit cards. If someone tries to switch between cards within the same parent company, they may not be allowed the balance transfer offer twice. This will be at the company’s discretion.

Life of balance transfer credit cards

If someone in this situation is finding that the balance transfer fees are starting to eat into a large proportion of the money they set to save on interest charges, they may want to consider getting a life of balance transfer credit card.

Life of balance transfer credit cards offer the user a very low APR of between 6% and 7% on the amount transferred until the debt is cleared.

Don’t purchase with a balance transfer credit card

The key thing to remember with any balance transfer card is to not use them for anything else, such as purchases or cash withdrawals, if you have transferred a balance over.

Credit card companies have a set order in which they will apply any payments you make to your credit card debt.

The general rule is that most companies will use your payments to clear the cheapest debt first.

The lower the interest rate (APR), the cheaper the debt so, if you are in the middle of a 0% balance transfer offer and you then go and withdraw cash using your credit card, any payments you make will go towards clearing the interest-free balance. Meanwhile, the cash balance will accrue interest charges at around 27.9% per year.

Calculate your savings

You can use our Balance Transfer Calculator to see how much you set to save by transferring your existing debt to a 0% interest credit card.



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