The beginner’s guide to balance transfers

If you're paying hefty interest charges on expensive borrowing, shifting what you owe onto a balance transfer card could help demolish your debts faster and for less. Victoria Bischoff explains…

Balance transfer credit cards have been big news in recent years.

If you owe money on pricey plastic and expensive loans, shifting your debt onto a long term low rate or 0% card could save you a small fortune in interest payments and help you to ditch your debt faster.

However, every balance transfer deal is different. Therefore, it's crucial you pick the right plastic for you.

In this article, I'll run through everything you need to know before applying for a balance transfer deal - and explain what pitfalls to watch out for.

What is a balance transfer?

A balance transfer does exactly what it says on the tin!

It's an offer that allows you to transfer existing, expensive debt onto a new credit card with a lower interest rate - usually for a small fee.

This means that, instead of all your hard earned cash being swallowed up by interest payments each month, more of your money goes towards beating down your balance.

Some balance transfer cards, such as the Virgin Credit Card, will also allow you to pay off non-card debts such as personal loans or overdrafts.

How much money could I save?

With most credit cards charging a standard interest rate of around 16% - 17% APR, you stand to make some serious savings by switching your debts to a card with a cheaper rate.

However, the amount of money you save will depend on the rate of interest you're currently paying, how much money you owe and which type of balance transfer deal you choose.

What types of balance transfer are there?

0% deals

A credit card with a 0% balance transfer deal will eliminate your interest payments entirely for a set period of time.

After paying a small fee for the privilege of shifting your debts, every single penny you repay will then go towards chipping away at your total borrowing instead of being devoured by your card's APR.

At 16 months, the Virgin Credit Card currently offers the longest 0% deal on the market. It charges a balance transfer fee of 2.98%.

In this article, Laura Starkey reveals how you could save £565 this year by transferring your old debts on to the Virgin Credit Card.

However, 0% offers tend to be limited, temporary deals.

Therefore, if you fail to repay your debt within the promotional period available, your remaining balance will be hit with your card's much less friendly standard rate of interest.

Long term low rate deals

If you suspect you may not be able to repay your debt within the 0% offer period, you might be better off opting for a credit card with a long term low rate deal.

Although you will still have to pay some interest each month, this is likely to be set at a much more affordable level.

At 6.8% APR, the Barclaycard Simplicity Visa currently offers the cheapest low rate offer around. Better yet, this deal will last forever - or as long as it takes you to repay your transferred debt in full.

You can find out more about the benefits of long term low rate deals here.

Can balance transfers ever go wrong?

If used wisely, a balance transfer credit card can be a brilliant way to beat down old debts. However, nothing is ever foolproof: it's crucial you handle your balance transfer card with care.

Here are my three golden rules for successful balance transfers.

1. Never miss a payment

If you fail to meet your monthly repayments or exceed your credit limit, you're likely to be stung with a nasty fine of around £12. Worse yet, your provider may decide to withdraw your promotional balance transfer offer.

Furthermore, irresponsible borrowing behaviour could seriously damage your credit rating, making it more difficult for you to obtain credit in the future.

One of the safest ways to ensure you never miss a payment is to set up a direct debit that will pay a set sum off your card each month.

2. Pay off your balance before the offer period expires

As I've already explained, failing to pay off your balance transfer within the limited offer period could be an expensive mistake.

Unless you can successfully apply for a new card to shift your remaining debts to, you could end up back at square one: paying an expensive interest rate and struggling to make your balance any smaller.

Therefore, it's crucial that you budget for your regular repayments carefully. Work out how much time you need to clear your debt in full - and ask yourself whether you can realistically achieve this before the 0% clock stops ticking.

If not, as I mentioned earlier, a long term, low rate deal might be the better option for you.

3. Never spend on your balance transfer card

Finally, it's crucial you remember the shiniest golden rule of all: never spend on a balance transfer credit card.

If you do, you run the risk of being stung by what's known as negative payment hierarchy. (To find out more about this nasty credit card trick, read this article.)

If you do need a credit card for spending and dealing with old debts, a card with an identical balance transfer and purchases promotional periods could be your safest option.

Right now, the Bank of Scotland All In One Credit Card and the Halifax All In One Credit Card both offer 0% on balance transfers and 0% on new purchases for 9 months.

On the other hand, if all you need is a credit card for new spending, you may find a card with 0% purchasing power could be the cheapest way for you to borrow. As always, before spending on one of these cards, make sure you plan to clear your debt completely before the interest free over ends.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**