Buyer's guide: Balance transfer credit cards


0% interest©iStock.com/TimArbaev

BALANCE transfer deals can turn unwieldy, expensive credit card debts into cheap, manageable borrowing that can more easily be paid off in full.

This guide will explain how balance transfer cards work, covering the main terms such as transfer fees and interest-free periods. We'll also look at some potential problems to watch out for with these cards, as well as balance transfer offers to be wary of. Finally we consider some options for those with bad credit struggling to get a decent 0% deal.

As the 0% deal is the most famous of the balance transfer cards, that's the one we'll focus on here, but other options - including life of balance and money balance cards will be touched upon too.

Before we get into the details though, here's three of the best 0% balance transfer credit cards currently on the market to give consumers an idea of the type of deal they could be getting:

Balance TransferTransfer Fee
aa balance transferAA Balance Transfer0% for 37 months
1.99%
Representative example: When you spend £1,200 at a purchase rate of 18.9% p.a. (variable), your representative APR will be 18.9% APR (variable).
AA Credit Cards are provided by Bank of Ireland UK. AA Financial Services Limited is a credit broker and not a lender.
post office money balance transferPost Office Money Balance Transfer0% for 37 months
1.99%
Representative example: When you spend £1,200 at a purchase rate of 18.9% p.a. (variable), your representative APR will be 18.9% APR (variable).
Post Office Credit Cards are provided by Bank of Ireland UK. Post Office Limited is a credit broker and not a lender.
post office money matchedPost Office Money Matched0% for 30 months
2.75%
Representative example: When you spend £1,200 at a purchase rate of 18.9% p.a. (variable), your representative APR will be 18.9% APR (variable).
Post Office Credit Cards are provided by Bank of Ireland UK. Post Office Limited is a credit broker and not a lender.

Search for more 0% balance transfer deals on our main comparison table here.

How balance transfer credit cards work

As these deals can be filled with loopholes, and choosing the wrong one can result in costly mistakes, it's worth taking the time to learn the basics, and understand the main terms and conditions, before jumping in.

How much can I save?

Credit cards may be accessible, but they aren't a particularly cheap form of borrowing. Interest rates average at around 18% p.a; and with some cards, those for credit-builders or newer borrowers - they can be even higher.

So balance transfer credit cards, offering 0% interest for a set period of time, present an opportunity to break the cycle of card debt by clearing the principle balance whilst avoiding additional costs.

For example, imagine a credit card has an outstanding balance of £3,000 and an APR of 16.9%. The cardholder decides to pay off £200 a month over 12 months; the table below shows how much better off they'd be switching to a balance transfer deal.

16.9% p.a. 0% deal
Interest paid after 12 months £350.98 £0 (+ £90 fee)
Balance after 12 months £1150.98 £890

Note there's a balance transfer fee that has been calculated using an average fee of 3%, we look at these in more detail below.

How long is the 0% period?

The exact length of an interest-free period differs between providers and card deals.

The cards listed in the table above offer 0% interest periods that vary between 30 and 37 months in length. But longer periods are available, with some providers like Santander offering as long as 43 months.

0% balance transfers for 39 mths (no fee)
Representative example: When you spend £1,200 at a purchase rate of 15.9% p.a. (variable), with a £36 annual fee, your representative APR will be 21.7% APR (variable).
0% balance transfers for 38 mths (1.4% fee)
Representative example: When you spend £1,200 at a purchase rate of 19.9% p.a. (variable), your representative APR will be 19.9% APR (variable).
0% balance transfers for 38 mths (2.69% fee)
Includes transfers to a current account (3.94% fee)
Representative example: When you spend £1,200 at a purchase rate of 18.94% p.a. (variable), your representative APR will be 18.9% APR (variable).

Keep in mind that the longest offer isn't always the best option, in terms of saving money though, especially for those with small or very large balances.

But it's important to consider how likely clearing the balance within any introductory period is going to be.

It sounds obvious, but millions of people let their balances lapse and lose millions of pounds in the process.

Another option is to look at life of balance credit cards. These offer low rates on balance transfers until the amount is repaid in full - so cardholders don't have to worry that the low rate on the debt will end before they can repay it.

Transfer fees and working out what's cheapest

Given that most people use balance transfer cards to pay off existing balances, rather than for additional spending, and long introductory deals limit revenues from interest, transfer fees are a way for the card provider to make some income from their new customer.

The exact transfer fee will vary between providers and card deals but the average is around 3% of the overall balance being moved. It may sound quite low as a percentage but it can be quite costly for those with larger balances:

For example, 3% would cost:

Again, low rate life of balance cards, which usually come without transfer fees, may be a more suitable alternative.

However, the good news is that just as increased competition has led to longer 0% periods, it's also helping to reduce transfer fees.

It's now possible to get 0% balance transfer deals offering transfer fees that are less than 1%:

0% balance transfers for 30 mths (0.55% fee)
Includes transfers to a current account (4% fee)
Representative example: When you spend £1,200 at a purchase rate of 20.9% p.a. (variable), your representative APR will be 20.9% APR (variable).
0% balance transfers for 33 mths (0.59% fee)
Representative example: When you spend £1,200 at a purchase rate of 18.95% p.a. (variable), your representative APR will be 18.9% APR (variable).
0% balance transfers for 28 mths (0.5% fee)
Representative example: When you spend £1,200 at a purchase rate of 18.94% p.a. (variable), your representative APR will be 18.9% APR (variable).

Some cards even waive transfer fees altogether such as the Barclaycard No Fee Platinum Balance Transfer card and the TSB Advance card, as well as the Santander All in One card already listed above.

0% balance transfers for 25 mths (no fee)
Representative example: When you spend £1,200 at a purchase rate of 19.9% p.a. (variable), your representative APR will be 19.9% APR (variable).
Representative example: When you spend £1,200 at a purchase rate of 6.5% p.a. (variable), your representative APR will be 6.5% APR (variable).
AA Credit Cards are provided by Bank of Ireland UK. AA Financial Services Limited is a credit broker and not a lender.

A word of caution though; many of the lowest fees are coupled with demands for a high transfer amount or a shorter 0% period.

In this instance the initial saving on a cheaper fee would soon be dwarfed if the debt was still outstanding when the standard interest rate kicks in - and research suggests around a third of us find ourselves in this situation.

Moving the balance and the terms of the offers

The balance transfer is made by the new card issuer, who will pay off the current debt and set up the amount on the new account.

Most balance transfer deals have set transfer windows, in which holders need to move the balance to qualify for the 0% rate.

As these vary, and missing one can make a substantial difference to the cost of the debt, be sure to check exactly when it closes.

People with debts on several credit cards can transfer them all to one balance transfer credit card, providing the total transfer amount falls within the card's given credit limit.

Every balance will incur a transfer fee - but because the fee is calculated as the percentage of the total amount being moved, it doesn't cost any more to move the same total amount from one or multiple accounts.

For example, two people are transferring £3000 to new cards, each with a 3% fee:

Person 1 3% fee Person 2 3% fee
£3,000 from Card A to Card B £90 £1,500 from Card A to Card B
£1,000 from Card C to Card B
£500 from Card D to Card B
£45
£30
£15
Total transfer fee £90 Total transfer fee £90

Paying off other debts at 0%

Money transfer credit cards allow the balance of a 0% transfer card to be used to fund a current account, rather than paying off another card as is the case with most standard balance transfer offers.

Being able to move the 0% balance to a current account can be useful for repaying overdraft debt, as well as other small loans. Additionally, for the brave and clever only, these cards are also the ones used for stoozing.

Yet be warned these cards usually have higher fees.

We've covered this area of balance transfer deals in more detail in this guide here.

Balance transfer offers to be wary about

There are a few credit card deals out there that are perhaps a little disingenuous and should be avoided where possible.

Rewards for transferring a balance: this can be a nice added extra - but only if users aren't tempted to spend on the card for more rewards until the balance transfer is repaid. It's also crucial to bear in mind that the rewards shouldn't be chosen over a better balance transfer deal.

For example, in November 2011 Barclaycard released a deal promising 11% cash back on purchases when cardholders transferred a balance to the card.

However, not only was cash back earning severely restricted, cardholders ran the risk of ending up paying interest on their spending.

Spend requirements: these have almost disappeared since the change in allocation of payments law. But they used to require cardholders to make purchases when opening an account (for example, £500 in the first three months) in order to lengthen the 0% balance transfer period.

This resulted in purchases on the account accruing interest, while payments only went towards the cheaper balance transfer.

0% purchase periods: while less of an issue nowadays, for the same reason as spending requirements, 0% purchases deals offered with balance transfers should be approached with caution.

Apart from increasing card debt, unless the 0% purchase and transfer portions of the deal last the same length of time, it can be tricky to avoid interest entirely. See details of this MBNA promotion or these ones by Lloyds TSB and Halifax for more information.

Potential Problems

Cash withdrawals and purchases

Balance transfer cards haven't traditionally been that good at multitasking.

Now, though, credit card providers always put payments made to an account towards the balances with the highest interest rate first. So that means making a purchase or cash transaction while using a balance transfer credit card is perfectly ok, right? Maybe not...

Paying back in full: although higher rate balances are paid off first, this doesn't mean that interest can be avoided altogether.

Credit cards are only completely interest free when the balance is paid in full. It's pretty much impossible, therefore, to avoid incurring some interest - and where balance transfer cardholders are concerned, this goes against the whole point.

Which rate is 'higher'?: Note that credit card providers also have different definitions regarding which part of the card balance counts as having the "higher" interest rate.

Some class the interest that would be incurred by the transferred balance as higher than, say, that resulting from the (lower) purchase balance - even if both have a 0% promotional period.

Our full guide to payment allocation goes into this in more detail.

High interest and fees: cash advances often attract much higher interest rates than traditional purchases - especially on cards offering 0% deals. They're also subject to handling fees. Both will add considerable expense and slow down the process of trying to pay back debt.

Losing the promotional rate

The terms and conditions of most 0% transfer deals are quite specific: miss a minimum payment and the promotional rate will vanish.

Around a fifth of balance transfer account holders have seen their 0% rate removed after breaking one or other of the terms of their credit contract - usually for missing or being late with a payment.

Setting up a direct debit to cover at least the minimum payment every month should help avoid that pitfall - but that won't help the small proportion who go over their card's credit limit.

Find out what the minimum requirements for keeping the 0% rate are, and stick to them. Being moved back onto the standard interest rate could work out very expensive - and missing payments will affect credit ratings, making it even more difficult to find a replacement deal.

Poor credit and balance transfers

One of the big problems with balance transfers is that, even though they're sold to break the back of high interest debt, they are very often premium deals that demand applicants have a good to excellent credit rating.

People concerned that their history won't be up to scratch, fear not: there are options out there.

Whilst those with bad credit may still qualify for some balance transfer deals, their best bet may be to approach their current bank and enquire about deals for existing customers.

We've covered this in more detail here.

For more information on balance transfer deals for those with poor credit go to our main guide on the subject here

Debt problems

Finally, balance transfers are designed to help tackle debt, but there are real limits to what they can achieve.

People whose debt is becoming unmanageable, or who can't see the light at the end of the tunnel, would likely find it well worth contacting a not-for-profit advice body such as StepChange (CCCS), National Debtline or Citizen's Advice.

Find more information on what the different free debt advice services offer, and how to get in touch in this guide.

They're there to offer help on issues just like this, and can offer free and impartial advice.


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