Balance transfer credit cards allow borrowers to move debt from one credit card to another. You may ask why would a borrower want to move debt from one card to another: to pay a lower rate of interest, usually 0%.
For example, if a borrower had debts of £3000 on a Halifax credit card -- with an annual rate 16% APR -- they could apply for a MBNA balance transfer credit card with a 0% period of 31 months. This would represent a saving of hundreds of pounds of interest over a three year period, giving the borrower ample time and opportunity to get a 'hold' over their debt.
You may be asking what the catch is? there is typically a one off fee charged when a borrower shifts their debt from their existing card to a balance transfer credit card. The fee is usually in the region of 2%-3% -- which would be £60-£90 on the £3000 debt example highlighted above -- or is a one off standard amount, such as £20-£50. While the fee is high, for borrowers with a relatively high level of debt, they will still make a considerable saving on the interest they would have paid.
Another issue with balance transfer credit cards is that once the card's 0% interest period ends, the interest usually jumps to a high level of interest: 18-22% is typical; which is probably higher than the interest the borrower was originally paying. Therefore, it is essential that borrowers pay down a large proportion of the balance on the card before the 0% interest period ends. Borrowers should also check the fineprint of the balance transfer credit card to see what interest is charged on new purchases; sometimes new purchases accrue interest immediately at 18-22%; obviously this is something to avoid if possible.
Another aspect borrowers should consider when applying for a balance transfer credit card is how it may affect their credit score. Every time a borrower applies for or closes a credit card account, the action has the potential to lower a credit score, therefore, it is usually advised to only apply for one card at a time, and not to close existing accounts.
Finally, check for any penalty charges that can be charged if a borrower misses a payment on their new balance transfer credit card.
Currently, the following balance transfer credit cards are on the market: