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Balance transfer credit cards

In contrast to traditional credit cards which provide a flexible form of borrowing for spending, balance transfer credit cards can help you to manage your credit card debt.

A balance transfer credit card allows you to transfer an outstanding balance (debt) from another credit card, to switch to a lower interest rate. Many providers offer cards with 0% interest on transferred balances, but the 0% is typically only available for a limited introductory period. Most providers will charge you a fee for transferring a balance – usually a percentage of the balance you're transferring – and in general the longer the special rate lasts, the higher the fee will be.

When used carefully, balance transfer credit cards can help you to manage your credit card debt effectively – but there are a few important things to be aware of.

Interest rates on balance transfer credit cards

While a balance transfer card may offer 0% interest on your transferred balance, it will usually have a much higher interest rate for new purchases and cash withdrawals. Equally, a credit card with a special low rate of interest on purchases may charge you high interest on balance transfers. Before you apply for a credit card, make sure you understand all the terms and conditions, charges and interest rates.

Lenders' hierarchy of payment

When taking payments and calculating your interest, credit card companies use something called a hierarchy of payment. This means that when you make a payment, it will be allocated in whichever order the company states in its terms and conditions.

  • Say for example that you have transferred a balance of £1,000 onto a card with 0% interest on balance transfers.
  • You then use the card to spend £500.
  • At the end of the month you want to pay off your spending in full to avoid high interest charges, so you make a payment of £500.
  • The hierarchy of payment could mean that you can't pay off any spending until you've cleared your transferred balance in full; so the £500 repayment you made will go towards your transferred balance instead of your new spending, leaving your £500 spend untouched – you will now owe interest on this spending.

To avoid getting caught out this way, simply don't make purchases with your balance transfer credit card, unless the terms are more favourable. In an increasingly competitive market, some balance transfer credit cards now also come with 0% interest periods on new spending – check the details with the lender.

A balance transfer checklist

As with any financial product, it's important to make sure you fully understand the terms and conditions of a credit card before you apply. Here's a checklist of things you will need to know:

  • When will the introductory rate expire?
  • What rate will you be charged when the introductory period is over?
  • What types of transactions are covered by the 0% offer?
  • What are the rates for other types of transactions?
  • How much is the balance transfer fee?

If you haven't paid off your balance by the time the introductory period ends, you should consider switching to another card before your interest rate shoots up.

Last updated: 22 May 2015

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