Balance Transfer Credit Cards – What Are They?
In short, balance transfer credit cards can be a great way to pay off your debt and save a ton of money. If you’re struggling to pay off your credit card debt, a 0% balance transfer credit card may be the answer to (some of) your prayers.
Balance Transfer Credit Card
If this is the first time you’ve heard of a balance transfer credit card – don’t worry, we’ve got your back. A 0% balance transfer credit card consolidates debt from existing credit cards. Simply put, say you have a debt of £5000, you transfer £5000 from the 0% interest credit card, and then you now have interest free debt.
For a set period, you will not pay any interest on the amount that you moved over. This can range from as short as 3 months to 30 months, it just depends on the card you get accepted for – or choose, if you’ve been working on your credit score. We would always recommend going for the most extended interest-free period possible, so it covers you in case you need more time.
An important thing to remember is that balance transfer cards do not actually reduce the amount of debt you have. They do, however, reduce the amount of interest that you are paying. Hopefully this will make it more likely that you will clear your debt quicker and cheaper.
How does a balance transfer work?
The bank or credit lender will arrange the transfer for you. All you have to do is let the credit card company know which debt you want to transfer the amount onto.
Good news for you is that there are so many 0% balance transfer credit cards on the market. Many offer a “no fee” to entice new customers in.
It is essential to look out for the 0%, and no-fee offers because that will cost you nothing for the period you agreed and the transfer. Some companies provide a 1-3% transfer fee. If possible, stay away from these.
Balance transfer cards are there to not only reduce the amount of interest you’re paying but also help out those who need it. You could also take advantage of a balance transfer card to make more money – but this will be covered in a later article.
People with bad credit and who owe money should think about applying for interest-free balance transfer cards. If you have a good credit score, you’re going to be offered a longer 0% period than someone with a bad rating. However, people with bad ratings have nothing to lose. They already have a poor score, pay high interest, so really should consider applying!
Will this help my credit score?
Long term – Yes, it will! If your debt payments per month are going to be cheaper, it should be easier to at least hit the minimum repayment. And cost you a lot less to actually pay off your debt balance.
The lower debt repayments should make your finances more manageable and therefore reduce your need to maybe take on more debt, to finance the old debt.
However, do be mindful that obviously applying for a credit product will make a hard inquiry on your credit file. This will reduce your credit score slightly, which you can read more about here. So if you’re looking to build your credit score up because you want to apply for a mortgage soon, then do be careful with applying for cards!
Things to watch out for?
Obviously, don’t rush into taking out a financial product that in essence requires you to borrow money from one lender to pay another. You need to make sure that you take your time when you are looking at these products.
With these offers, it is important to check the length of the term you have been offered and then stick to paying off your debt within that term. This is because the interest rate could be higher after the term than the one you’re paying at the moment.
So for example, you have debt now at 15% interest, but you acquire a balance transfer credit card at 0% for the next 6 months before it skyrockets to 28% interest. It’s okay – slowly getting your debt down during that 6 months, but if it sky rockets up to 28% after and you still have a balance, then you’ll end up with more debt!
Also do beware that many cards have a transfer fee. It’s not hidden or anything so you will see it. But some companies lure you in with 0% interest free and then stick a 3% transfer fee on! Obviously, work out the transfer fee and see if it is worth it. If it is and that’s the only one offered to you then accept the card!
Things to remember!
Please, please, please, if you take out a card with an interest free period remember, you MUST make the minimum payment EVERY single month. If not, you will lose the interest free period and usually have to pay higher rates than you did on your standard card. This would also mess up your credit score, so DO at least make the minimum repayment.
You can use a comparison site to see which deals are best for you, and also use a soft search eligibility checker to see how likely you are to be accepted for the card! Remember, these won’t hurt your score, and they give you a good indication of how likely it is you’ll be accepted.
Have you got any experience with balance transfer cards? Let us know in the comments!