The cost of living crisis has seen prices for everything from food to energy rise. According to The Money Charity, the Bank of England predicted that households spent, on average, an extra £740 in December 2022. The charity also revealed that 42% of UK adults had to borrow money last year in the face of rising costs.
With the Bank of England saying there’s a risk of a recession for the UK, now is a good time to look at your own finances and find better ways to manage any debt you may have. A balance transfer could be one option. So, what is this exactly and how can it help?
How a balance transfer might help
A balance transfer credit card is designed to receive the outstanding balance of one, or more credit cards. It’s a way to consolidate debt and can be beneficial as the balance transfer card usually has a very low, or in many cases, 0% interest for a specified period. Therefore, by transferring your balance, it’s possible to focus on paying off the actual debt without needing to pay higher interest.
The pros of balance transfer cards
Balance transfer cards with low interest rates aren’t time limited, while the interest free period for 0% balance transfer cards may be for a fixed time. So you may want to clear your outstanding transfer balance quickly to avoid paying too much interest. If you can stay on top of your repayments this can help you to manage your money better, as it allows you to:
- Focus on clearing any smaller debts that have been hanging around for a while.
- Manage your debts by being able to see them all in one place.
- Clear your debt quicker if you’re paying 0% interest on balance transfers.
Transferring a balance can help towards improving your credit score as it can help you to better manage and pay down your debts. However, this will form part of the bigger picture and any score improvements depend on your overall financial behaviour.
Cons of balance transfer cards
It’s important that you’re aware of how long you have to pay your debt off. As with any other type of credit repayment, you’ll need to keep up with payments until it’s cleared. And some balance transfer cards will also charge a transfer fee based on a percentage of the amount you’re transferring.
It’s also important to note that this type of credit card has a credit limit. This means that you can only transfer in amounts within that limit. If you take out this type of card and spend on it, you’ll have to pay off what you’ve spent before you start paying off the transferred amount. When you make a payment towards your credit card the spend balance will be prioritised over a lower rate or 0% transfer balance.
Things to consider
Before you take out this type of card, it’s important that you consider a number of factors:
- What’s the interest rate?
- If it has an interest-free period, how long does it last?
- Do you pay a fee for each balance you transfer?
- If you’re taking out a balance transfer card to pay off transferred debts, it’s crucial that you make sure you can pay it off on time.
There are lots of factors to consider before taking out a balance transfer card, so check that it’s suitable for you before you proceed.