Balance transfer credit cards are one of the most popular ways to begin clearing debts. So if your New Year’s Resolution is to work on becoming debt-free in 2023, or you’re looking to save some money on interest fees, this blog post is for you.
When you think about it, New Year’s resolutions are a bit unusual. So what is it about this time of year that leads to such a shift in mindset? Do habit changes suddenly become easier when the clock chimes midnight and a chorus of fireworks usher in the 1st of January?!
Unfortunately, for many of us, January can be a bit of a tough time when it comes to our finances. The festive season is behind us, and it’s a bit of a damp and cold slog until payday and the promise of brighter evenings. But looking to the future can help to bring a little hope into our lives.
Build your financial resilience in 2023
Using this time to work on our financial wellbeing can make us feel more positive about the months ahead. It’s no secret that having debts hanging over your head can make you feel all sorts of different emotions. So putting together a solid plan to build positive financial habits in 2023 could free you up to focus on the things that matter to you.
So whether you’ve already been scouring the internet for the best balance card transfer offers of 2023, or they’re totally new to you, we’re here to help. Grab a cuppa and we’ll help you understand what balance transfers are, how they work, when they might be a good idea, and how they could affect your credit score.
What does a balance transfer mean?
If you’re considering paying off your credit cards in 2023, January is a great month to take advantage of inviting promotional rates for balance transfers.
Some people find that balance transfers make repaying their debts easier because they simplify repayments. But there are many different methods for paying off debts — balance transfers are only one of them — so, before you make a decision, take some time to think about whether they’re the best option for you
What is a credit card balance transfer?
In the UK, balance transfer credit cards allow you to transfer debts from your existing credit card to a new, usually lower-interest-rate, credit card. This is sometimes called “consolidating” your outstanding balances.
Your “credit card balance” is the amount of money you’ve borrowed from your credit card provider. When you transfer your balance, you are moving your borrowing from one provider to another.
It’s often possible to use a single balance transfer credit card to simplify repayments from multiple credit card accounts. That can be really helpful if you have lots of different credit cards, or find it difficult to keep track of repayments.
Are balance transfers free?
We’re sorry to say this, but the short answer is no. It’s incredibly rare to find credit cards that don’t incur some form of fee. But you can be safe in the knowledge that — assuming the card provider is FCA regulated — all of the fees should be stated in the terms and conditions when you apply.
(Pssst… if you’re often tempted to avoid the small print, this is your sign to add that to your list of new habits to improve in 2023!)
While balance transfers aren’t “free”, you’ll often find introductory offers of 0% APR (0% interest) for a certain period of time. But it’s likely that you will be charged an upfront fee for the service, often called a “handling fee.” (More on this below.)
If you’re unsure about what APR is, check out Loqbox Learn: Understand Key Banking Terms.
If you’re considering a balance transfer, it’s worth shopping around for the lowest interest rates you can find. At this time of year, many providers will offer introductory rates of 0% APR for between 6 and 34 months.
That could mean that you might avoid paying interest on your outstanding credit card balances for over two years! But keep reading, because it’s important to bear in mind that you might not be offered the advertised interest rate — or full introductory period — when you apply.
How do balance transfers work?
If you get approved for a balance transfer, your card provider will ask you about your existing cards. They will usually then pay them off for you, charging the “handling fee” that we described above.
Handling fees are usually expressed as a percentage. So if the handling fee is 5%, and you’re planning to transfer a £1,000 balance, you would expect to carry £1,050 over to your new balance transfer credit card.
If you manage to access a 0% interest period, or a low-interest period, you could avoid wasting your hard-earned cash. That might help you to feel calmer about approaching your debt repayments.
If this all sounds too good to be true, bear in mind that using a balance transfer to move debts from one card to another is only the first step in your journey to becoming debt-free. You will still need a solid plan for overcoming your debts in the long term.
How can balance transfers affect your borrowing?
The first thing to be clear on is that transferring your credit card balances doesn’t change the amount you are currently borrowing. Balance transfers move your debt from one, or multiple, high-interest credit cards onto a single card.
It’s often a good idea to look at balance transfers as a tool to help you reach your goal of paying off your debts, rather than as the solution to them.
Paying off your debts is a brilliant goal, but it takes a lot of commitment and hard work. Many people find the process difficult, or even overwhelming, so if you feel that you might benefit from a little extra support, we’ve listed some resources at the end of this blog.
Are balance transfers a good idea for people trying to pay off their debts?
As with most financial decisions, the answer to this question isn’t a clear “yes” or “no.” Instead, deciding whether a balance transfer is right for you will depend on your own personal situation.
When used properly, balance transfers can be a great option if you’re trying to pay off your credit card debt in full. If you’re disciplined, it could well be worth considering. But ask yourself the following questions before you apply:
1. Do you have a solid plan to pay off the balance, in full?
If your goal is to clear your debts, it’s worth putting together a budget to pay off your plan in full during the introductory period. Providers often charge higher interest fees after the introductory period, so do your research. Remember — no two cards are the same!
2. Will you always be able to cover the minimum payment?
Try to be realistic about what you can comfortably afford to pay each month. Ask yourself, “Will I always be able to cover the minimum payment?”
Pro tip: Depending on your provider, you could lose your balance transfer offer if you aren’t able to keep up with repayments.
3. Are you in control of your spending?
It’s a good rule of thumb to avoid using your balance transfer card for new purchases. The interest-free period often only applies to balance transfers, not purchases. If you expect to need to use a card for spending, opt for a card that also offers 0% on purchases. But if you’re serious about dealing with your debts, it’s a good idea to limit non-essential spending in general.
4. Are you planning any big financial decisions in the near future?
If you’re thinking about paying off your credit card debt, you might well be doing so because you have a long-term goal in mind, such as buying a home. If that’s the case, it’s worth considering how applying for balance transfer credit cards might affect your credit score.
Are balance transfers good for my credit score?
What is a credit score?
Before we dig into the nitty gritty of how balance transfer credit cards might affect your credit score, it’s important to understand what a credit score is, and how paying attention to yours might help you improve your financial wellbeing.
Credit scores are there to help you understand how lenders might view your credit history. An improved credit score can help you access better rates on all sorts of financial products. You can find out more about them in our blog post: What is a credit score? How is it calculated and what affects it?
Will balance transfers affect my credit score?
In general, any changes to your credit use will be reflected in your credit report. When new information is added to your credit history, your credit score will usually change. But that’s not always a bad thing.
When you apply for a credit card, most lenders will do what’s called a “hard credit check.” This gives them a detailed picture of your financial situation, including any outstanding lines of credit, and information about how you’ve managed your borrowing in the past.
Hard searches leave a record on your credit report. So after applying for a balance transfer card, it’s normal to see an initial dip. But reducing the amount of credit you’re using usually has a positive impact on your credit score over time.
That’s because lenders like to see a high credit limit — which means the amount of credit available to you — and a low credit utilisation — which means the amount of credit you’re using. That indicates that you can handle credit responsibly and that you’re on top of repayments.
If you’re approved for a balance transfer, your overall credit limit should increase. Bear in mind that cancelling your existing credit cards would actually reduce your overall available credit. If you use your balance transfer as intended — to gradually reduce your overall credit balance — it’s likely that you’ll see your credit score improve over time.
How can I get approved for a balance transfer credit card?
Check your credit score before you apply
Whenever you’re considering applying for credit, it’s worth checking your credit score. Doing so can give you a better idea of how likely you are to be approved.
In the UK, there are three main credit reference agencies: Equifax, Experian and TransUnion. Different lenders check your credit scores with different CRAs, so make sure you check your credit score with all three of them.
Remember to check your credit report with all three of the main UK credit reference agencies: Equifax, Experian and TransUnion. They each have their own unique way of generating your credit score.
Find out how to check your credit score.
If you’re credit score needs improvement, work on it before you apply
If your credit score needs improvement, or it looks like you’re unlikely to be offered the rates you want on a balance transfer, it’s a good idea to boost your credit score before you apply.
What can I do if paying off my debts feels overwhelming?
If you have significant debts — or you’re feeling overwhelmed about all of the options available to you — it might be worth speaking with a professional who could help you to consider your options.