As one of the risks associated with credit cards is the danger of payments increasing – or not decreasing – due to high interest charges. Given this, a balance transfer can go some way towards helping a credit card borrower manage their debt.
What is a Balance Transfer?
Balance transfers allow those with credit cards or store cards to switch their outstanding debt owed on one credit card to another. This is generally done from a credit card with a high rate of interest to one offered at a more competitive rate. Though most credit cards offer an interest free period during which the balance shown on a monthly statement should be paid off, any unpaid balance will carry over to the next month and will be charged interest. The result of this is that the amount outstanding is likely to increase, with this increased amount itself being subject to interest charges.
Therefore, a balance transfer is usually done to save money when repaying any existing debt due to the lower interest rates imposed.
In addition, balance transfers may be suited to those who want to organise their finances in all one place: a number of small, high interest credit card debts may be consolidated to form one large, low-interest credit card debt, with multiple credit card payments reduced to one.
How do Balance Transfers Work?
A credit card balance transfer is a simple process once the customer has narrowed down the best balance transfer cards available to them. A balance transfer request form will firstly need to be filled out (this can be done online if necessary), detailing whether part of or all of a person’s existing debt is required to be transferred. The amount eligible to switch to a new card is restricted by a customer’s credit limit, with most providers allowing a maximum transfer of no more than 90% to 95% of this limit.
0% Balance Transfers
Once a balance transfer is approved, the best balance transfers available allow a customer to take advantage of a promotional interest free period in which they have the opportunity to pay off their outstanding debt, or at least substantially reduce it. 0% balance transfers can save customers the most money by not charging interest for as long as the introductory deal lasts, enabling them to repay their balance faster. Interest free balance transfers usually stay in effect for between 6 to 12 months, though this varies between lenders. A 0% balance transfer for 6 months, for example, means no interest on a credit has to be paid for a period of 6 months.
After this time, the rate will usually jump to the lender’s standard rate – so if the transferred balance has not yet been paid off, it will begin to incur interest.
However, such an interest free balance transfer will still usually result in the customer paying substantial credit card charges in the form of handling fees. A lender can set this as a percentage of the balance being transferred, usually in the region of 2% to 3%.
Free Balance Transfers
Nevertheless, with a select few credit card balance transfers, no fee is charged. A free balance transfer offer is difficult to find on the market, but such an opportunity would be particularly handy for those switching debts of large amounts. Unsurprisingly, few free balance transfers come with the interest free introductory period, so it is worth taking time to consider what option would result in the best balance transfer deals.
Balance Transfer Calculators
Balance transfer calculators are useful tools for credit card customers to work out the best balance transfer periods most suitable for them. A balance transfer calculator will show the interest amount payable with an existing card versus what would be paid if the balance was transferred.