But as tempting as these offers can be, you need to know how to make them work, and make sure that you take out the right card or you could inadvertently end up paying interest.
Use our guide to get the low down.
What are 0% balance transfers?
Moving your existing credit card debt to a 0% balance transfer card can save you hundreds of pounds in interest. Once you have moved your balance, you won’t have to pay any interest until the promotional period has ended. However, a balance transfer fee - usually around 3% - is charged, taking a bite out of any potential savings made by not paying interest. You can find cards offering interest-free transfers for up to 16 months; however, if you want to combine this with interest-free purchases, you’ll probably have to settle for a shorter interest-free period.
You do have to make sure that you use your interest-free time wisely, though, and take care to clear your balance before you have to start paying interest on it.
What to look out for:
- Balance transfer fees - Interest-free debt is no longer free and you should expect to pay a fee of around 3% of your total balance when transferring.
- Banking groups - You can’t transfer debt between two cards owned by the same banking group, for example, from a Natwest card (www.natwest.com) to an RBS card (www.rbs.co.uk) as RBS owns NatWest.
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What are 0% purchases?
A 0% purchase credit cards lets you spend on your credit card for the duration of the offer without having to pay any interest on what you buy.
On most cards that offer both a balance transfer and interest-free shopping, the purchases promotion will be shorter than the balance transfer - but if you look carefully, you can find cards offering interest-free shopping for as long as 12 months.
Look out for:
- Short promotional periods that will leave you paying interest on your purchases until you have cleared your full credit card debt.
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Tips on using both a balance transfer and interest free shopping
It is a good idea to pay off the full balance of your credit card before either one of the promotions expires, otherwise you’ll end up paying interest on a chunk of your debt.
So if your 0% purchases offer lasts six months, and your balance transfer offer is for 12 months, you should aim to have your card cleared after the first six months, when the first offer ends.
If you can’t do this, you should only use one of the offers on your card - or you’ll minimise your benefits by incurring interest.
This is because of the way that credit card companies allocate your repayments. Any repayments you make will go against the “cheapest” debt - namely your balance transfer that is interest-free for longer than your purchases. This is known as a “negative payment hierarchy”.
Although the government ordered this practice to cease in 2011, some card issuers still impose it and will probably continue until they’re ordered to stop. So check the fine print of any card you’re thinking of applying for to see which type of payment hierarchy it imposes. But if your card issuer does impose a negative payment hierarchy, this is how it works.
So if you’ve transferred £1,000 for 12 months at 0%, then spent £500 at six months without interest, and repay that £500 at the end of the purchases period, it will actually go against your balance transfer.
You’ll then have £500 still interest-free from the £1,000 you transferred, and will be paying the standard APR on your £500 purchases until you have cleared the remainder of your interest-free balance transfer from your card.
The best thing to do may be to find a card that offers balance transfers and interest free purchases for the same length of time, though this might mean that you’ll have to settle for slightly shorter offers.
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Case study
Usage:
- Transfer £1,500 debt when you open the card
- Spend £100 a month on the card
Savings:
- £178 interest saved on the balance transfer (£223 interest minus the £45 balance transfer fee) over 12 months
- £97 interest saved on purchases over 12 months
- £275 saved in total
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Health warning
Don’t use these offers as an excuse to go crazy and spend more than you can afford to pay back.
Only use your card for the things that you would buy anyway, making sure that you’ve paid off your debt before the promotions end. Otherwise, the interest you have to pay will soon exceed anything you gained from these offers.
A good idea is to put the money you would have used to pay off your card each month into a high-interest savings account for the duration of the 0% promotions.
This way you can earn interest on this money, and have it handy to clear your debt before you have to start paying interest.
You have to be disciplined to make this work, though, so be honest with yourself, and don’t get yourself into further debt that you can’t pay off.
However, while interest rates on savings accounts are at their current low level, the benefits of this tactic can be limited.
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