How Balance Transfers Work

Consolidation of debts has become a popular pastime in the UK. Especially after a big blow out such as Christmas, when we have several credit card bills and maybe a few store card bills. How much easier would it be just to pay one bill?

Balance transfers are pretty much what they say on the tin – a shift of money from one account to another. The term is very often used in reference to credit cards. For example, if you have one credit card with £300 to pay off and another with £500, you may be able to reduce the amount of interest you incur by consolidating the amounts on to one card.

This means moving one balance to a different card, or paying one off using the credit of another. Once the borrowings are all under one card, it may be easier and quicker to pay off as you are only paying one bill and one interest rate.

Also, some lenders offer special rates, such as zero per cent interest, when people decide to take out a credit card with them. Also they may offer a lower or zero percent interest rate if you transfer a balance to their card as well. There are pros and cons to deals like this.

If you transfer a balance to another card that has - for example - a rate of zero per cent for three months, you can therefore have a respite period from paying off interest. In other words, 100 per cent of the money you repay will go towards the outstanding amount and not the interest. It means your balance should reduce quicker.

However, lenders know that this is a tempting situation for borrowers, so they may add extra charges into the bargain, such as a flat fee for balance transfers.

For savvy borrowers, balance transfers can be a useful way to minimise extra payments and interest - just read the small print carefully and be organised with what has to be paid off and when.

If you would like to know more about balance transfers why not ask AnswerBank Business and Finance.