A Tool to Reduce Debt: What is a Balance Transfer?

A Balance Transfer can help you manage credit card debt by moving outstanding credit card balances from one or more “expensive” credit cards to another “cheaper” credit card (i.e., a balance transfer credit card), in order to save money on interest payments and consequently pay down debt faster. Used carefully, it may be useful for those who cannot pay down their current credit card debt right away and are paying high interest charges on their existing card balances. Interest rates can be 20%, 30%, 40%, or more on some credit cards, making it very difficult to make progress with debt repayment. Moving those debts to a 0% interest balance transfer card can be a very useful tool for getting your credit card balances paid down quicker.

How Can I Pay Down Debt Faster with a Balance Transfer Card?

Balances transferred to a 0% interest card will reduce faster because 100% of your payments go towards reducing your outstanding balance; none of your monthly payments will be lost to interest charges during the 0% interest period on your balance transfer card. On an interest-bearing credit card, on the other hand, a lot of your hard-earned money goes towards interest charges. Let’s say you’ve racked up a £3,500 balance on a credit card charging 18.9% interest. You would like to pay this off, and can manage £100 monthly payments towards this effort. On your current interest-charging card, the credit card company will take £55 of your first £100 monthly payment as interest charges!

Instead, if your balance were sitting on a 0% interest balance transfer card, your whole £100 payment would go directly to reduce your balance. In this way, your balance will reduce to £0 faster and you will save loads on interest payments along the way. The higher your interest rate, the more advantageous a balance transfer. The following chart shows how the balance will reduce over time on three cards: a 29.9% APR card, a 18.9% APR card, and a 0% interest balance transfer card. In all three cases, you pay £100 a month to the credit card company. By 36 months you have paid £3,500 to the bank. What is the status of your debt situation? On the 0% balance transfer card your debt is entirely paid off (yeah!). On the 18.9% card you still have a £1,350 of outstanding debt. On the 29.9% card you are left with a whopping £2,650 remaining. This is the power of a balance transfer.

A graph showing Paying Down a £3,500 Balance on a three different cards, with interest rates of 0%, 18.9%, and 29.9%, through £100 monthly payments.
Reducing Debt: Paying Down a £3,500 Balance on Three Different Cards - 0%, 18.9%, and 29.9% APRs

Be Aware

A balance transfer can wreak havoc on your financial situation, if you're not aware of the small print. For starters, balance transfer offers only apply to balances transferred within an initial "window" in order to receive the 0% introductory rate and a potentially lower transfer fee. On most credit cards, this window is 60 days or 90 days. Transfer a balance after this window has closed and you'll be on the hook for the stated APR, which can easily be 18% or much more.

Second, if you are late on even a single monthly payment (0% doesn't mean £0 monthly payments!) your intro 0% rate may be revoked and, just like if you miss the intro transfer window, you'll be charged the stated, ongoing interest rate, racking up interest charges.

Features of a Balance Transfer Offer: Fee and Length

Balance transfer offers are characterized by two features, which you need to understand in order to choose the best balance transfer off for you:

  • The fee (charged once per balance transfer)
  • The length (i.e., months) of 0% interest

What Is a Balance Transfer Fee?

A balance-transfer credit card charges a fee when you move existing debts from another card. This fee is represented as a percent (%) of the balance and typically varies from 0% to 5% (sometimes with a £3 or £5 minimum). Typically, this fee varies according to the length of the 0% period: the shorter the 0% period, the lower the fee, the longer the 0% period, the higher the fee. This fee structure does make sense – a longer 0% period implies you will take longer to pay down your debt, which is riskier for the bank, hence they charge a higher fee as compensation.

What is a 0% Interest Period on a Balance Transfer?

The best balance transfer deals offer a 0% interest period on balance transfers. During this “intro” period you will pay no interest charges. This doesn’t mean you won’t pay anything at all – but it means that all your monthly payments will go directly towards reducing your outstanding debt, which is great because you will be debt free sooner.

I like to think of balance transfer offers as falling into one of three buckets – short, medium, and long – each with defining characteristics. The standout feature of short balance transfers is that they (should) charge no fee. Currently, the best deals on no-fee cards are in the range of 24 to 26 months of 0% interest. Long balance transfers offer the longest 0% period, typically 40 to 43 months, and charge higher fees up to 3% to 3.5%. Medium balance transfers fall somewhere in between.

Typical Balance Transfer FeesTypical 0% Interest Periods (months)
Short Balance Transfer0%up to 26
Medium Balance Transfer0.55% - 2.5%27 - 37
Long Balance Transfer1.78% - 3.29%38 - 43

How Much Can I Save on a Balance Transfer?

A balance transfer can save you hundreds or even thousands of pounds in interest payments, depending, of course, on the size of your existing balances, your monthly payments, and current interest rates. In the above example, moving a balance from an 18.9% interest rate card to a 0% interest balance transfer card can save around £1,500 in interest payments over the years. We will discuss how to optimize and find the most suitable balance transfer offer for you – given your level of debt and capacity for monthly payments – but even choosing the “wrong” balance transfer card (i.e., picking a balance transfer card with too many or too few months of 0% interest) is likely to save you money over your existing interest-charging card.

How to Choose the Best Balance Transfer Card for Me?

The right balance transfer card for you depends primarily on how long you need to pay down your debt. If you'll need 30 months to pay down your debt, first narrow down your selection to balance transfer offers with a 30 to 32 month 0% interest period, then choose the card with the lowest fee you can find amongst the group. The chart below can help you decide the time needed to pay down your debt, given your starting balance and the size of your monthly payments.

A graph showing how many months it will take to pay back a balance, given the monthly payments. This information is used to determine the duration of the best balance transfer offer for you.
How many Months to Pay Off Your Debt? It Depends on the Balance and Monthly Payments

Once you've narrowed down your search by months of 0% interest, it can be confusing to compare the many balance transfer deals available to the UK consumer. Offers will vary in both fee and length of 0%. So how does Virgin Money's 30 month/0.55% fee compare to Lloyds Bank 32 month/0.8% fee? In order to make the comparison simpler across cards, we do a like for like comparison by calculating the balance transfer fee PER MONTH: Balance transfer fee (%) ÷ 0% interest period (months). Clearly, the cards charging NO balance transfer fee are the "cheapest" at 0% per month. But if you don't expect to pay down your transferred balance within 24 to 26 months, you'll need a card with a longer 0% interest duration, and that's where this calculation comes into play. To find the best balance transfer deals, choose a card with a low fee/length cost.

CardBalance Transfer Fee per Month of 0% Interest
Halifax 0% Balance Transfer Fee Offer0%
Virgin 24 Months at 0%0%
Sainsbury's No Balance Transfer Fee0%
Tesco 0% Balance Transfer Fee0%
Virgin 30 Months at 0%0.018%
Barclay Platinum 32-Month0.020%
Halifax Low Fee Balance Transfer Offer0.022%
Virgin 40 Months at 0%0.045%
Lloyds Platinum 42-Month0.056%
MBNA Platinum 43-Month0.070%
nuba transfer card^0.078% (0.031%)

^nuba is giving a £20 Amazon.co.uk voucher on transfers of £1,000 or more, effectively bringing the effective balance transfer fee on a £1,000 transfer down to 0.032%

How To Transfer a Credit Card Balance

Once you have your new balance transfer credit card, transferring the balance is quite easy. While each bank will have a slightly different process, it generally works as follows:

Steps to Transfer a Balance

  • 1) Log into your new online account (the bank will instruct you how to set this up)
  • 2) Click on the link to transfer a balance
  • 3) Enter the amount you want to transfer
  • 4) Enter the details of the credit card from which you are moving your balance
  • 5) Check and hit submit!