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Guide to balance transfer cards

Since the 1990s, balance transfer credit cards have been amongst the most popular cards in the UK, and it’s easy to see why.

Balance transfer cards can be used to save money by reducing the interest you pay to 0%, for a set period of time. These cards can, therefore, be a valuable tool for people needing some financial breathing-space, or those wanting to repay their debts more quickly, by avoiding interest charges.

How do balance transfers work?

Balance transferring is simply the process of transferring a debt (a balance) from one credit card to another. Many credit card issuers offer this facility but, without a promotional offer, the debt simply accrues interest at the standard rate.

However, if you get a card offering 0% interest on balances transferred for an introductory period, you can save money, by avoiding interest that would otherwise be charged, and pay off your debt more quickly, because your monthly repayments are used to clear the debt - rather than servicing interest charges.

Balance transfer periods

UK credit card issuers now offer 0% interest-free on balance transfers in excess of 3 years. So, how can they afford to do this? And how do they make any money?

Credit card issuers use tempting 0% balance transfers to attract new customers, but, to some degree, they can cherry-pick customers as they don’t have to offer their eye-catching rates to everyone. Those with poorer credit scores are often offered weaker products, using a process called "risk based pricing”.

Risk based pricing is entirely legal, as the rates published for credit products are “Representative”. Being representative means that at least 51% of their customers must receive the advertised rate, leaving the other 49% of applicants to be offered shorter transfer periods, higher interest rates, or both (this is known as ‘downselling’). Downsell rates are published in the summary sheet of the offer you are applying for, and should be considered before you start your application.

You also need to be aware that once your promotional rate expires, the interest charged on any remaining balance will revert to your card’s standard APR, which tends to be well into double digits. It is at this point, when interest rates spike, that credit card issuers start to make money from many customers.

Of course, sometimes credit card issuers make money from balance transfer cards much earlier. For instance, if you don’t make your minimum monthly payments on time and in full, or if you exceed your credit limit, you will automatically forfeit your introductory offer, and your issuer's standard interest rate will be applied to your remaining balance.

Balance transfer fees

Although balance transfer cards are often called “interest-free cards”, the term can be misleading, since they are not always cost free. Most cards require their customers to pay a fee to ‘facilitate’ the balance transfer between banks/building societies.

Balance transfer fees charged by credit card providers range from 0% to 3.5% of the amount transferred, and most issuers have a minimum balance transfer fee (of around £5).

Transfer fees are not usually payable by customers at the time that they transfer. Instead, the cost of the transfer is added to the balance which has been transferred. This is generally preferable, as it ensures customers need not find the money to pay the fees at the point they transfer. However, if you miss an early monthly payment, you can find you are paying interest on balance transfer fees you can draw no benefit from.

What are balance transfer fee refunds?

As the balance transfer has become increasingly competitive, credit card issuers have developed new ways to react to competitor product changes, without having to redesign their own product every time.

One of these methods is the ‘balance transfer fee refund’. When a fee refund is offered, the issuer typically charges their original fee and then credits the consumers’ accounts with a refund at a later date (typically between 30 - 90 days).

Fee refunds are usually processed automatically. There are often conditions associated with the refund but, in reality, these are not onerous. They tend to include requirements that consumers are not in default and are not in the process of closing their account, which most people will meet.

Interest rates on balance transfer cards

While looking for a balance transfer card, it can be easy to ignore the standard APRs, as the primary focus is generally on the length of the 0% period. However, credit cards offer a range of different interest rates, and these should also be considered when choosing a card , even if you plan to pay off the balance within the 0% period. While there is usually an opportunity to shift your debt to another balance transfer cards when your deal expires, there is always the chance you may not be eligible.

Benefits of balance transferring

The most obvious advantage of balance transfer cards is that they enable cardholders to reduce the interest they are paying on their credit card debt, by fixing it at 0% for a given period. This enables cardholders to reduce their debts more quickly, as payments clear the balance, rather than servicing interest charges.

Another benefit of using balance transfer credit cards is that they can improve your credit score. By paying off debts on time, individuals can show that they can manage credit effectively, demonstrating to other prospective lenders that they represent a ‘good risk’.

What to watch for when balance transferring

Although balance transfers can appear very attractive, there are things that you should consider before getting, and while using, a balance transfer product.

Credit ratings and balance transfers

You need an excellent credit rating to be offered the best 0% balance transfer cards. But, if you don’t have a great credit score, all is not lost, because many credit card issuers ‘downsell’ to applicants.

Being offered a lower rate can be frustrating, as you are not getting the rates you applied for, but the alternative is often no balance transfer whatsoever. And, because balance transfers are naturally less costly than standard credit cards, they aid those with weaker credit ratings by giving them a better opportunity to improve their credit score (by making payments on time and spending within their credit limit), which can help them obtain better credit terms in the future.

Every credit card issuer has a different ‘scorecard’ (a method of assessing the risk of applicants using complicated algorithms). It is, therefore, always advisable to check your credit rating and only apply for a balance transfer card that offers the maximum 0% duration you need to pay off your card.

For example, if your credit score is good but isn’t perfect, and you have worked out that you need 30 months to realistically pay off your balance, don’t be tempted to reach for the dizzy heights of a ‘top of the table’ card of, for example, 40 months, as it may be that you are rejected, but offered a ‘downsell’ credit card of 21 months, which is insufficient for your needs. Instead, apply for a card offering around 30 months, which you are more likely to be accepted for.

Remember that multiple credit card applications at once will adversely affect your credit rating (as potential creditors perceive you to be more ‘high risk’), so pick a suitable card and only apply for that one.

Purchasing with a balance transfer card

The best use of a balance transfer credit card is to clear debt - so you should avoid spending on your card. However, if you know in advance that you are likely to spend on your card, or you want to have the flexibility to do so without being unduly penalised (with high purchase interest preventing you from clearing your main balance), a balance transfer and purchase card is probably your best option.

To obtain balance transfer and purchases at 0%, you will need to compromise on the duration of your balance transfer deal (often by more than ten months). However, for many people, this is a price worth paying for greater financial flexibility.

Transferring within a banking group

In most cases, cardholders are unable to transfer balances between two cards within the same bank or banking group.

For example, AA credit card customers will not be able to transfer debts to a Post Office card (as both cards are issued by Bank of Ireland).

It is important to bear this in mind when selecting a product, as a card would be practically useless if you are unable to use it for the very purpose you applied.

Also, every time you apply for credit, your rating initially declines, as lenders assess your ability to cope with the additional credit you have obtained. This can prevent you from getting a suitable alternative if you do make a mistake, so double check before applying.

Make your minimum payments

Probably the most import thing to remember, when using a balance transfer card, is to make your minimum payments on time.

The minimum payment, as the name suggests, is the absolute minimum that the borrower must repay (usually 1-2% of the outstanding balance). If you don’t make these payments, your offer will be withdrawn.

Of course, to make the most of the interest-free period, it makes more sense to pay off as much as possible every month.

The final word

The enduring popularity of balance transfer cards demonstrates their value to customers. These products can be one of the most powerful personal finance tools available.

However, if used inappropriately (for whatever reason), they can also lead to unnecessary charges, and exacerbate the issue they were intended to fix.

If you think a balance transfer card is right for you, use it wisely, use it quickly, stay on top of your finances and switch to a card that is more rewarding.