Balance transfers on your credit card

What is a balance transfer?

A balance transfer is when you move debt from one credit card to another, or from several cards on to one single card.

What are the benefits?

If you owe money on one credit card, or across several, then moving that debt on to a different card with a lower rate could help you save on repayments. Many credit card companies offer incentives to new customers, such as a 0% period on balance transfers or lower interest rates, which could help you save on repayments and pay off your balance more quickly. Some companies also offer rewards.

Another benefit of a balance transfer is that it can help you to organise your finances. If you owe money over several credit cards, then combining those monthly payments into one could make them easier to keep track of, and even potentially lower your outgoings, according to The Money Advice Service.

How does it work?

Your bank or credit card company can offer information on how to transfer your balance – the process is quite straightforward, and can often be done online. Financial lenders may charge a fee for balance transfers, which will vary based on the amount to be moved and the duration of the 0% period. Credit card providers tend to allow customers to transfer up to 90 to 95% of their available credit limit. They do this to allow for the addition of the balance transfer fee within the customer's agreed credit limit.

Balance transfer in practice

Let's take 'Mrs Smith' as an example.

  • She has a balance of £1,000 on a credit card with an APR (annual percentage rate) of 16%.
  • She wants to transfer her balance on to a new credit card that's offering 0% on balance transfers for 12 months. The new card provider will allow Mrs Smith to transfer up to 95% of her agreed credit limit.
  • Mrs Smith asks the new card provider to transfer her existing balance. The provider pays £1,000 to the old card provider, which in this instance incurs a balance transfer fee of 2.9%. When the balance transfer is completed, the balance transfer fee will be added on to the balance of Mrs Smith's credit card.
  • Her old card is now debt-free, as the balance has been transferred to the new card. Mrs Smith now owes £1,000 to her new provider, plus the fee for transferring her balance to the new card, but at a cheaper interest rate of 0%. Mrs Smith can then make payments towards her account, and payments will automatically go towards paying off the fee first, before clearing the balance.

What are the limitations of a balance transfer?

You can spend on a credit card that you've made a balance transfer to. However if you want to make new purchases with your card, it means that you'll be adding to the balance, rather than paying it off.

It also is important to meet the monthly minimum payments – if you fail to make a payment then you could forfeit your 0% deal.