0% balance transfer credit cards - is it really free?

By Martin Fagan - news@consumerchoices.co.uk

When 0% credit cards were first introduced, consumers stampeded into them. But card issuers have got wise and now levy fees and sneaky tricks to pump their profits. We show you what to look out for.

0% balance transfer credit cards revolutionised the credit card market, sparking a rate war in as lenders fought to entice consumers with long interest-free periods and additional perks.

But then the banks got wise to the “rate tarts” who would transfer 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 fixed fee to a percentage of the balance being transferred.

Compare 0% balance transfers credit cards.

Are 0% balance transfers still worth it?

Although 0% balance transfer 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 0% interest 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 0% promotional period then a Lifetime balance transfer credit card may be more suitable.

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0% balance transfer fees

Getting hold of a 0% Balance transfer deal that doesn’t levy any additional fees is, these days, almost nigh impossible. Balance transfer fees vary by provider and by card, but they generally range from around 2.9% to 3.5%

While this doesn’t seem like much, you do need to work out how much it’s going to cost you to move your debt. Transferring a balance of £3,000 at 3.5% will set you back £105 in fees. So whatever amount you’re looking to transfer (depending on the limits the new card imposes), simply look for the card that offers the lowest percentage fee like the Virgin Credit Card which charges 2.7%.

You can justify a slightly higher transfer fee in exchange for a significantly longer 0% period - but compare the costs so you make the right choice.

The rate after your deal ends

If you don’t think you’ll clear the debt by the end of the 0% transfer period, you need to be aware of how much interest you’ll end up paying. The credit cards in the UK carry an average interest rate of 18% APR and you don’t want to be paying this rate on any outstanding debt if you can help it.

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 whether you’d be better off keeping it where it is or moving your debt to a new credit card.

If it’s going to take you a long time to pay off your substantial debts, then a 0% card isn’t the best choice. Instead, go for one with a low life-of-balance rate.

Compare Lifetime balance transfer credit card.

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Balance transfers with tiered interest repayments

It’s always good to know how credit cards work and the way that your balance is paid off, as it isn’t as straightforward as you might think. But thanks to a change in legislation, the tiered part of the payment now works in your favour.

Previously, repayments were tiered by the card issuer so that the “cheapest” part of your debt was paid off first, and those purchases carrying the highest rates of interest would be paid off last; a nice little earner for the card company as debts charged at more expensive rates - such as cash advances which can carry as much as 30% interest - would sit in your account, accruing interest and be the last to be paid off.

This practice is known as “negative payment hierarchy” and is for the welfare of card issuers, not cardholders.

However, effective from 1 April 2011, card companies now have to settle the most expensive debt first - “positive payment hierarchy” - which works in your favour as the monthly repayment has to pay off the highest interest debt first.

Another major change affecting 0% cards is that the minimum repayment now must at least cover interest, fees, charges and 1% of the debt. For many people who have a 0% card and are still loading purchases onto it, this is a bit of a double-edged sword, as although it means the debt you’ve transferred to the card is being paid off quicker, that’s because the minimum payment is larger than before.

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The length of the 0% balance transfer promotion

This is the headline attraction for most borrowers wanting to move their debt to a 0% balance transfer credit card. In 2000, when Egg launched the first 0% balance transfer 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 24 months with the Barclaycard Platinum credit card. Although this has a 3.2% transfer fee, which will cost you £96 on a £3,000 transfer, you would pay far less on the transfer fee than you would in interest payments over the course of 24 months on a card with the average 18% APR.

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Interest free purchases included?

As well as paying 0% on the money you transfer to the card, many lenders also offer 0% interest on purchases for a set period. While this not only tempts you into spending more on your card, it can also 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.

Compare the latest 0% interest on purchases

Cash withdrawals on your credit card, whether at a cash machine or as cash-back in a store, will mean not only paying a higher rate of interest for the privilege, but also having to pay interest on the cash immediately rather than enjoying an interest-free period.

Most people know this, but are unaware of exactly what 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.

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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, this will be at a lower, more affordable rate and you won’t be faced with a sudden jump to a high APR at the end of the year.

If you're not sure which card is best for you, do a search to compare Credit Cards and see which ones have the longest interest free period, what the balance 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.

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Stoozing

Stoozing is the relatively new trend of racking up purchases on a 0% interest credit card until the credit limit is reached and then depositing the money you would have otherwise spent paying off the credit card in a high interest bank account. When the introductory 0% rate on the credit card is coming to an end, you withdraw the cash from the bank and pay the card off in full. This way, “stoozers” make money by paying no interest on their purchases while earning interest on the money they would otherwise have been spending.

If you decide to do this you must be disciplined with your savings. If you spend any of the money needed to pay off your debt, you'll soon lose out - if you don’t have enough cash to clear your balance, the interest you end up paying when your 0% deal runs out will be far more than the interest you earned through stoozing.

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Is there anything else I should look out for?

While credit card companies will dazzle you with enticing offers, it’s important to always remember that these are financial institutions designed to make money from their customers.

Here are a few traps to avoid:

• Make sure you clear your debt before the promotional period ends. If you can’t, then transfer any remaining balance to another 0% interest introductory deal or low life-of-balance card
• Balance transfer deals are often only open to new customers. Even though the cards may have a different name on them, if they are owned by the same bank or banking group you may not be able to switch between the two
• Watch out for a minimum monthly spend clause applied to some cards. If you fail to spend the minimum amount each month then you’ll be subject to standard interest rates
• Never use your credit card for cash withdrawals. Balance transfer card or not, you’ll pay a hefty sum of interest for cash withdrawals
• Don’t apply for too many credit cards, 0% balance or otherwise, in a short space of time. Having a long history of credit card applications on your credit file will have a negative impact upon your credit rating, particularly in this “credit crunch” era. Read our Guide to understanding your credit score for more on this.
• If you’ve transferred your balance to a new card but are tempted to continue spending, then cut the card up immediately. Self discipline is a vital ingredient in clearing outstanding balances. Also bear in mind that although you’ll be charged 0% interest on balance transfers, you’ll be charged for purchases, so be mindful of the extra debt you’re racking up on the card.