The UK credit card market is highly competitive. Card issuers continually vie for new business with innovative and competitive products like 0% purchases, cashback and rewards. However, despite the breadth of choice available, over the last decade, one card type has remained most popular, the 0% balance transfer.
What are balance transfer cards?
0% balance transfer cards enable us to save time and money when clearing credit card debts. We save money, because our balance incurs no interest for a fixed introductory period, and we can save time, because if we continue to make repayments at the same value, we can repay our balance far quicker than we would if we were paying interest on it.
Balance transfer cards are popular, but they are not equally valuable. Getting the optimal deal requires balancing a number of considerations, and even with the best deal possible, many cardholders fail to maximise the opportunity it presents. Nevertheless, by following a few golden rules and with sensible use, a balance transfer card could be a valuable addition to your purse or wallet.
Balance transfer cards look and feel like any other credit card. In fact, in many respects, balance transfer cards mirror the credit cards they are intended to replace, albeit with one crucial difference, they offer a favourable rate on existing credit card balances transferred to them.
Getting the best balance transfer card
Deal specifics vary from card to card, but intense competition means most cards offer 0% interest for a fixed period. However, while balance transfer cards are interest-free for a period and most charge no annual fee, these cards are not free, and there are a number of things that should inform your decision-making, including:
The main attraction of balance transfer credit cards is the interest-free period they offer, but this should be considered in conjunction with the other pricing details. Card issuers know that table-topping products with lengthy 0% durations tend to sell themselves. However, it is often the case that these products charge higher transfer fees than cards offering shorter transfer durations.
Since the transfer fee might be the only charge you incur from your product you should seek to minimise it, if possible. Calculate how quickly you can clear your balance with monthly payments you can reasonably afford. Then, if you don't need a card offering a market-leading duration, opt for a card with a shorter (but adequate) 0% period and a lower fee.
Balance transfer fees
Balance transfer fees are fees charged by card issuers for processing a transfer. They are only charged by the card you are transferring to (your existing card issuer will not impose a penalty for switching), and are usually a percentage of the total transfer.
In most cases the more you transfer the higher the cost, but this is not always true. Many card issuers charge minimum transfer fees which apply to those transferring smaller sums. Some also stipulate that a transfer cannot take you above a certain threshold of your credit limit, so, if you make purchases on your card before transferring, your maximum transfer limit will be diminished.
Of course, if you're transferring a large balance, the prospect of finding the money to pay a transfer fee can be daunting, since it will probably be more than your current minimum monthly payment. However, card issuers understand this would discourage applications, therefore they enable transfer fees to be incorporated into your overall balance (and these are not considered part of the percentage of your limit available for transfers).
Although transfer fees are relatively easy to understand, fee refunds can cause some confusion. Balance transfer refunds usually occur when card issuers are looking to gain a tactical advantage over their competitors. They do this by reducing their fees for a limited period, but, rather than redesigning an entire product, they offer a refund for part of the fee they originally intended to charge. The refunds occur automatically, and in many cases, the cardholder would be entirely unaware. However, because the fees are initially charged at a higher rate, card issuers must specify the mechanics of the deal, and the mechanism for reimbursement.
You should look to minimise balance transfer fees where possible, by only paying for the period of 0% interest you actually require. However, if you are willing to take a risk, an alternative strategy could reduce your fees to zero.
By forfeiting a number of months at 0%, you can obtain cards that charge no fees whatsoever. However, you'll either need to clear your debt quickly (which could be tough), or you'll need switch regularly. This is not a Herculean task, but if the market changes (as it did during the last financial crisis), you may find your switching options have reduced dramatically.
The upside of this strategy is the money it saves, but in order to gain this, you may forfeit the certainty of a long 0% period.
Interest rates are easily overlooked when comparing balance transfer cards, as we inevitably focus on the duration of the 0% period. However, if you don't clear your transferred debt within the introductory period (and almost half of us don't), the interest rate reverts to standard rate (APR). This sends the cost of the debt soaring, and, while you can try to arrange a new 0% transfer, there is always the chance that you may not be eligible for a new card.
Standard interest rates on transfer cards tend to vary from 18% to 22%, so selecting a card with a lower interest rate can have a significant effect on the way compound interest increases your debt. With this in mind, if you have a narrowed your choice to two cards, with the same duration and fee, pick the one with the lower interest rate, not the prettiest design.
The majority of balance transfer cards don’t charge an annual fee, but a few do, so this must be incorporated into any calculations about how much to pay off your debt and over what period.
Understand your status
When lenders offer at market leading rates and with high credit limits, they want to ensure they will be repaid. They therefore reserve the best deals for people with excellent credit ratings (no missed payments, good repayment history, not over-indebted, etc.).
There are two ways that card issuers ensure that only people with the best credit ratings get their best deals.
Firstly, they publish details of the eligibility criteria for their products. These criteria are a guide to the minimum requirements and tend to include residency status, age, income and exclusions (CCJs, IVA, Bankruptcy). Meeting the minimum criteria does not mean you'll necessarily get a card, but it does discourage applications that are certain to fail.
The second method card issuers use to reserve the best deals for those with the best credit ratings is through ‘scoring’ and 'down-selling'.
With permission given as part of the application process, card issuers use credit reference (and other) data to assess an applicant’s financial status. If you meet their criteria, you'll be accepted. If you don't, you may be declined, or as is increasingly the case, you might be offered an alternative down-sell product.
Down-sell products are offered to people with reasonable credit ratings, who don't meet the requirements for the advertised offer. As such, these card offerings are weaker than the advertised product, with shorter 0% durations and higher interest rates. Advocates for these products would argue they enable people who would otherwise be rejected to obtain credit, yet they can be a disappointing alternative.
Before you apply for a credit card it is always best practice to check your credit score, the card issuer you apply to will do the same, so it's best to know what they'll see before you invite them to see it. If your credit score is poorer than you expect, take steps to remedy this before you apply. Or if you need to switch a balance soon, refocus your product search to balance transfer products that are available to people with average credit scores. If your credit score is lower than average, your options are going to be very limited. If you're in this position, repay what you can on your card, rebuild your credit score, and track your progress. When your credit score has recovered sufficiently, apply.
Managing your balance transfer card
In many respects, getting a balance transfer card is easier than managing one. However, by following a few simple guidelines you can ensure you get the most value from your card.
Minimum Monthly Payments
While balance transfer cards offer a holiday from interest payments, they do not offer a break from debt repayment.
You must always pay your monthly minimum (around 1-2% of your balance) every month.
If you fail to do this, your introductory offer will be immediately withdrawn, and your debt will incur interest at your standard APR.
You might think that, if your new standard APR rate is similar to the card you switched from, that you'll be no worse off. Unfortunately, this is not the case, since you'll also be paying high interest on the balance transfer fees you incurred.
Also, because all card issuers share client balance and repayment data with the UK credit reference agencies, your credit rating will suffer. This will mean your access to alternative credit will be compromised, and you could be trapped with a high rate card that you can't switch away from.
Arrange a direct debit for at least your minimum monthly repayment, to ensure that you do not miss the payment date (even good excuses will not save you).
Also remember that a minimum monthly payment is what it says, the minimum you should pay. If you only pay the minimum, you are very unlikely, unless you have a very small balance, to have cleared your debt before your introductory rate expires, and you could be signing yourself up to decades of debt repayments.
Purchasing with your balance transfer card
Although balance transfer cards’ main attraction is the 0% transfer functionality they offer, they can also be used in the same way as other credit cards, for purchasing. However, this is never advisable.
Where interest-free periods are offered for purchasing with market leading transfer products, these tend to be far shorter than the balance transfer durations. This means that purchases made on the credit card quickly incur the standard APR, and interest charges on purchases will diminish your ability to reduce your balance.
If you need to purchase from time to time, you should avoid market-leading balance transfer cards, as your behaviour will undermine their value. Instead, forfeit some of the 0% transfer duration you could get in favour of a card offering 0% purchases and transfers of equal length - a 'transfer and purchase card'.
All credit cards offer a ‘cash advance’ facility, where you can get money from an ATM. However, you should never use this. The interest charged on cash advances almost always exceeds the standard interest, and it is charged from the moment you make a withdrawal with no interest-free period. Further to this, most lenders often charge a cash advance fee as a percentage of the amount withdrawn.