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A balance transfer allows a customer to transfer the money they owe on one credit card to another – typically with the transferred balance enjoying a better interest rate on the new card. Many different credit cards and providers offer this feature. The term 'balance transfer card' generally refers to a credit card with a particularly low balance transfer rate.

How does a balance transfer work?

Credit cards work by giving you access to a pre-arranged amount of credit. Essentially you are borrowing money every time you make a purchase or payment using your credit card. Most cards have an interest-free period on purchases and, as long as you pay your balance in full by the due date each month you will not usually have to pay any interest.

If you do not pay off the balance in full you will usually be charged interest on whatever is left. A balance transfer is a way of paying an existing credit card balance using a different credit card. Essentially, the credit card company on the receiving end of a balance transfer pays off the old credit card debt and transfers it to their own card. You then owe the money to the provider of the new credit card.

What is a balance transfer rate?

The balance transfer rate is the amount of interest you pay on the balance you transfer. Many balance transfer cards offer a low introductory rate that may be as low as 0%. This means you would no interest at all on the transferred balance as long as the 0% rate applies. Some balance transfer rates last for the lifetime of the balance but others, especially the 0% ones only last for an agreed length of time. This is typically anything from between 6 and 18 months but could be even longer.

At the end of any introductory period the interest payable on any remaining balance will typically revert to the card's standard rate.

Will there be a fee to pay?

Most balance transfers have a balance transfer fee. This is typically around 3% but can vary depending on the provider and card. The fee is usually added to the balance when it is transferred. If, for example, you transferred £1,000 with a fee of 3%, your total balance on the new card would be £1,030. There may be a stipulation that the fee payable is a percentage or a set amount, whichever is larger. If you only transferred £200 and the fee was the larger of 3% or £20, your total balance would be £220. This would mean you had paid an effective fee of 10% for the balance transfer.

How much can I transfer?

How much you can transfer depends largely on the credit limit on your new or receiving card. The credit limit must be large enough to cover both the balance transfer itself and any fees applied. Some credit cards may also set a limit on the amount that can be transferred that is lower than the actual credit limit. This may be expressed as a percentage of the credit limit. If, for example, you were only allowed to transfer a balance of up to 90% on a card with a credit limit of £1,000 you could transfer up to £900.

Is there anything to look out for?

You should always make sure you are familiar with the terms and conditions attached to a new credit card. This can be even more important when dealing with balance transfers. If you are on a special balance transfer rate and you miss a payment date, for example, the entire balance may revert to the card's standard rate. There may also be a late payment fee applicable.

Some cards offer a low or 0% rate on balance transfers but not on purchases. Additionally, the lowest rate that applies to a particular balance is usually paid before any higher rate. This means that if you transfer a balance and then use the card to make purchases or other payments, any payments you make against the outstanding balance will be taken first from transferred balance. In the meantime the part of the balance built up through purchases will continue to accrue interest at the standard or higher rate.

Some cards do offer introductory rates on both balance transfers and purchases. The duration of these rates are not always the same however, meaning that new purchases may begin being charged at a higher rate before any transferred balance.

It's also worth remembering that balance transfers can take a while to complete. Interest may still be applied to the original account before the balance is transferred. If you meant to transfer the whole balance and clear your original card you should always check if there is anything left to pay off – even if it is only a few pence – once the balance transfer is completed.
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