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0% balance transfer credit cards
Balance transfer credit cards revolutionised the credit card market, sparking a rate war where lenders fought to entice consumers with longer interest free periods on their balance transfers and added extras like zero per cent on purchases too.
But then the banks got wise to the “rate tarts” who moved their balances at the end of every interest-free period to avoid paying interest - or their debt - and began introducing transfer fees. These are now standard across the industry and range from a set amount, to a percentage of the balance being transferred.
Although interest free credit cards don’t offer the “free debt” they used to, they are still a very competitive way of paying off your debts. If you’re confident that you can pay off your balance within the interest free period, without incurring interest on any other payments on the card, then they are a good idea. You just need to be aware of what to look out for.
If you think that you will not be able to pay off the full balance before the end of the promotional period then a lifetime balance transfer card may be more suitable.
Balance transfer fees vary by provider and by card, but generally range from between 2.5 and 3 per cent.
While this doesn’t seem like much you do need to work out how much it’s going to cost you to move your balance over. Transferring £3,000 of debt at three per cent will set you back £90. If you’re transferring less than this, look for the card that offers the lowest percentage fee like Barclaycard (www.barclaycard.co.uk) who charge only 2.5 per cent.
The rate after 0%
You need to be aware of how much interest you’ll be paying if you don’t clear your debt by the end of the zero per cent period. The average credit card in the UK carries 17.5 per cent interest (CreditAction, 2008) and you don’t want to be paying this much on any outstanding debt.
If you haven’t managed to clear the debt by the end of your interest free period, work out how long it will take you to pay off the remainder of the balance and see how much it will cost you to keep it on the current card as you might be better off moving it again.
If it’s going to take you along time to pay off your substantial debts then a zero per cent card isn’t the best choice. Go for one with a Low Life-of-Balance rate instead. (Compare Lifetime balance transfer credit cards)
It’s always good to know how credit cards work and the way that your balance is paid off isn’t as straightforward as you might think. Your repayments are tiered so that the “cheapest” part of your debt is paid off first, and those purchases carrying the highest rates of interest will be paid off last.
For example, if you have transferred a balance of £500 to your card and also taken a cash advance of £100, then make a repayment of £80, the payment will first be allocated to those balances that are at the lowest rate of interest, such as zero per cent balance transfer. Debts charged at more expensive rates, such as cash advances, which can carry as much as 30 per cent interest, will sit in your account, accruing interest and be the last to be paid off.
The length of the promotion
This is the headline attraction for most borrowers wanting to move their debt to interest free credit cards. In 2000, when Egg (www.egg.com) launched the first zero per cent credit card and others followed suit, consumers were offered a six month break from their interest payments if they transferred their balance.
Now this has extended to the current best buy of 15 months with the Virgin credit card (www.virginmoney.com). Although this has a 2.98 per cent transfer fee which will cost you £89.40 on a £3,000 transfer, you would save more than this over the course of 15 months compared to a card where you were paying 17.8 per cent APR.
Many credit cards now offer 0% interest on purchases for a set period too. While this not only tempts you into spending more on your card, it can lead to customers inadvertently tying themselves into higher interest rates on some purchases and instant cash transactions simply because they don’t understand how their card works.
Instant cash transactions always carry a higher rate of interest - which usually begins to add up instantly - and will be the last thing to be paid off. Most people know this, but are unaware of what exactly banks consider to be “instant cash transactions”. Obviously, making a withdrawal is an instant cash transaction, but some banks also consider online gambling and even buying gift vouchers to come under this category, so be careful that you don’t end up paying interest on your interest free credit card.
Which is the best 0% balance transfer card for me?
Remember, if you don’t think you’ll be able to pay off your entire balance within the interest free period, you should consider a lifetime balance transfer card instead. Although you’ll have to continue paying interest each month, you won’t be faced with a sudden jump to a high rate at the end of the year when you might still have a significant amount outstanding.
Or do a search to Compare Credit Cards to see which ones have the longest interest free period, what the transfer fee is and if you get interest free purchases too. Just be sure to read the terms and conditions carefully to ensure that you don’t end up paying out more than you expected.
