You may have heard credit card companies, or your friends mention credit card money transfers as a different way you can borrow money using a credit card, but what exactly is a money transfer?
A credit card money transfer is a type of transaction that borrows money from your credit card to pay into your current account. Money transfers usually cost an upfront fee of around 3% and may have high interest rates.
Read on to find out more about how money transfers work, important things you need to know and how to save money when doing a money transfer to your current account.
How does a Money Transfer work?
A money transfer is a relatively new type of credit card transaction that allows customers to effectively send money from their credit card to their current account.
You may be used to this transaction flowing the other way with your current account being used to make the monthly payments, but money transfers allow you to borrow an amount of money from your credit card that you can then transfer from your current account or withdraw as cash.
Using banking jargon, a money transfer works by debiting the requested amount from your credit card, incurring an increase in your credit card balance and then crediting this amount to your current account, thereby increasing its debit balance.
In practice, you will either use your credit card company's app or website to request a balance transfer and provide details of the current account you want to pay into. The bank will then carry out their standard checks and process the transaction.
Depending on your credit card company and your bank, it can take from minutes to a couple of days to show up in your current account, although you'll see the transaction right away in your credit card account.
Fees and charges for credit card money transfers
In the majority of cases, Money Transfers cost a one off fee which tends to be around 3% (sometimes 2.9% or 2.95%). In addition to that, money transfers will be charged a higher interest rate than other types of transaction on your credit card – sometimes the same as the cash interest rate, or somewhere in-between your retail interest rate and the cash one.
In the majority of cases, it's a bad idea to do a money transfer using the standard interest rate, as charges can rack up making it a very expensive way to borrow. For a lot of customers taking out a loan may mean much lower interest rates and fees.
A lot of companies will offer deals to existing customers or even better deals to new customers who apply for a new credit card that does money transfers. Existing customers will often get a 0% for 12 months offer while new customers can get as much as 2 years or more of interest-free money transfer costs.
Beware that the fee usually still applies so even on a 12 month deal, the 3% upfront fee is equivalent to an interest rate of roughly 6% spread over the same period – if you can qualify for a premium low interest loan, you may be better off going for that instead.
Another point to remember is that money transfers do not have a fixed repayment structure unless you are extremely disciplined to make the correct payments on the correct dates. That means that unlike a loan, when the 0% period ends, if you've only been making minimum payments, you will still owe a large chunk of your money transfer but will not be charged standard interest rates.
Not all credit card companies do money transfers
While money transfers are popular with some customers and very common with some providers, check your credit card Summary Box and Terms & Conditions to see whether they offer money transfers at all.
Some of the big names like MBNA and Barclaycard have done money transfers for a while and all of their main credit cards offer them. Others, such as Metro Bank or Santander don't do money transfers at all – some of the reasons are usually the relatively high risk of the bank not seeing their money back from these transactions or the operational difficulty in preventing fraud.
Among the companies who do offer money transfer functionality along with their credit cards, only a few will give long-term 0% deals to new customers. In addition to MBNA and Barclaycard mentioned above, Virgin are another brand that often has credit cards with 0% offers on money transfers for 2 years or more.
Things to know about money transfers
Just before you go and get your preferred money transfer credit card, there are a few things you should be aware of when considering doing a money transfer.
First, the offer of a money transfer as a service is not a guarantee. All credit card companies reserve the right to check each transaction against risk, fraud and other parameters and decline any transaction they do not like without needing to disclose a reason.
If the credit card company declines your money transfer request, there is not much you will be able to do about it. If you're applying for a new credit card – this is something to bear in mind because although it doesn't happen often, you can be stuck with a brand new card in your hands but not be able to use it for its main offer.
An easy way to fall foul of the money transfer pre-transaction checks is to try and transfer money to an account that is not held in your name or in a different version of your name – make sure the recipient current account has exactly the same name on it as the one on your credit card.
You will usually not be able to transfer money to a family member, however close, so your best option is to move it to your own current account and then move it on from there.
Another critical think to know about money transfers is the cloaking effect they have on interest. This may sound like a technical point, but you can end up paying £100s if you don't understand how this works.
If you have a balance on a credit card and you take out a large money transfer on a 0% deal, each time you make a payment, it will be allocated to the money transfer balance because its standard rate is higher than purchases or balance transfers.
This means that even if you pay enough to clear all your retail purchases, the money will instead pay off a portion of the money transfer and your retail transactions will begin incurring interest charges.
It is usually a good idea to not have any other spend on a credit card you use for a money transfer to avoid this and use a different card for your day to day spending.
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