A balance transfer can be an effective way to manage credit card debt and save money. But what exactly is a balance transfer, and how does it work?
What is a Balance Transfer?
A balance transfer moves the debt from one credit or store card to another credit card, usually with a lower interest rate. This strategy is popular because it can help reduce the amount of interest you pay, allowing you to focus more on clearing the balance rather than just paying off interest charges. For example, if you have a credit card with a high interest rate, transferring the balance to a card offering 0% interest for an introductory period could save you a significant amount of money. However, balance transfers often come with fees, so it’s important to weigh the potential savings against these costs.
Is a Balance Transfer Right for You?
Before deciding whether a balance transfer is right for you, it’s important to understand the key factors:
- Transfer Limits: You cannot transfer a balance from a card issued by the same bank. For example, if you hold a Barclaycard, you won’t be able to transfer balances from other cards issued by Barclays. The minimum amount you can transfer is typically £100, while the maximum is determined by your credit limit and existing balance on the new card.
- Repayment Rules: To maintain any promotional interest rates, it’s vital to pay at least the minimum monthly payment on time and stay within your credit limit. If you miss payments or exceed your credit limit, you could lose the promotional rates and revert to the card’s standard interest rate.
Why Would You Make a Balance Transfer?
There are several reasons why transferring your balance might be a smart financial move:
- Lower Interest Rates: One of the most common reasons for a balance transfer is to take advantage of lower interest rates. If you’re struggling to pay off your existing credit card balance due to high interest rates, switching to a balance transfer card with a 0% or low-interest introductory period can significantly reduce your monthly payments and total interest costs.
- Switching Incentives: Some credit card providers offer incentives such as cashback or discounts when you take out a balance transfer card. These rewards can make transferring your balance even more attractive.
Key Considerations Before a Balance Transfer
Before you go ahead with a balance transfer, consider the following:
- Introductory Period Length: If your balance transfer card offers a 0% interest rate, check how long the introductory period (also called a promotional rate period) lasts. After this period, you’ll revert to the standard interest rate, so make sure you can pay off the balance within that timeframe. Track your balance transfer with Incredible’s promotional rate tracker.
- Balance Transfer Fees: Balance transfers usually come with a one-time fee, which is a percentage of the amount being transferred (typically between 3% and 5%). While this fee may seem like an added cost, it’s often far less than the interest you would pay on your original card.
- Time Limits for Transfers: Many balance transfer cards require you to transfer your balance within a specific time frame—usually within the first three months—to benefit from the introductory offer.
- Using the Card for New Purchases: It’s generally best to avoid using a balance transfer card for new purchases. Any new debt on the card may be charged at a much higher interest rate, and you could end up paying more overall. Some cards offer both balance transfer and purchase offers, so check the details carefully.
How to Transfer Your Balance
Here’s a step-by-step guide to carrying out a balance transfer:
- Apply for a Balance Transfer Card: Research cards with low or 0% balance transfer offers, paying attention to how long the introductory period lasts and any associated fees. Use eligibility checkers to see your likelihood of approval without affecting your credit score.
- Request the Transfer: Once approved, you can request the balance transfer online or over the phone. You’ll need to provide the account details of your old card and specify the amount you wish to transfer.
- Pay Off the Debt: Start making regular payments to clear the balance before the 0% interest period ends. With Incredible, you can set up an automated payment for your balance transfer and any of your other credit cards. Learn more about how in our detailed blog on IncrediPay.
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