Why you don't need a 0% credit card
An interest-free card is not the answer for all borrowers.
Going through my post last night I found a letter from Halifax, the bank with which my wife and I have our joint account. And lucky old me! Apparently I am ‘guaranteed’ to be accepted for a credit card, offering 0% interest on purchases for 12 months and 0% interest on balance transfers for nine months.
It’s not the worst card in the world, and I have to admit I was a little tempted. After all, Christmas has been expensive (and it hasn’t even happened yet) and with my wife not yet back at work from maternity leave, money is a little on the tight side.
But a 0% credit card is not always the answer for borrowers.
Manageable chunks, for a while
Moving your debt to a 0% balance transfer card is lovely, for a while at least. You can cut that debt down into manageable chunks, and all of the money you pay goes completely towards the debt, rather than on interest payments.
For example, after my wedding, I put about £1,500 on an HSBC card which gave me 15 months of 0% interest. At £100 a month, that made life a lot easier.
But what if you have larger debt to move over? If I had moved £5,000 onto that old card, I’d have been looking at £333 a month in order to clear the debt before the interest-free period expired. That’s a pretty tall order.
And that’s even before you consider the fee that you’re charged in order to transfer the balance over in the first place, often around 3%. On a £5,000 transfer, that’s a fee of £150, hardly small change.
It’s much the same if you’ve made use of a card offering 0% on purchases (though obviously there’s no transfer fee to worry about).
A low rate for life
If you come to the end of your 0% period, you then face a dilemma. You either move your debt to a new card, going through all the hassle of shopping around, applying, then paying yet another fee to move your debt onto the new card. Or you start paying interest of 19% (or even more) on your remaining debt.
There’s a third option though – a card which offers a low rate of interest for life.
Yes, you will pay interest on your debt, but at a far lower level than with a normal credit card. And what’s more, you won’t have to pay a fee for transferring over your balance.
Over the long term you may end up spending less, and clearing your debt quicker.
A card for life, not just for Christmas
What I like about these cards is that they are really a long-term option. Something that has always concerned me about balance transfer cards is that there may be limits on when you can transfer debt onto the card – typically you can only do so in the first couple of months after getting the card.
But what happens if some unexpected expense – a new boiler for example – crops up six months down the line? Do you really want to take out yet another card?
There’s no such problem with low APR cards.
You can simply add to the balance, whether by purchasing directly with the card (as the rate of interest is identical on both purchases and balance transfers) or by using another card, and then moving that balance over.
The best low APR cards
There are just a few low APR cards worth considering:
Sainsbury’s Low Rate MasterCard
The Sainsbury’s Low Rate Mastercard is the market-leader, with a representative rate of 6.9% APR. However, in reality, if you’re accepted for the card you’ll be offered one of three rates – 6.9%, 9.9% or 12.9%, depending on your circumstances. Just 51% of those accepted for the Low Rate MasterCard are offered the lowest rate.
You’ll also have to have a Nectar card, though you can get one free here.
Barclaycard Simplicity
The Barclaycard Simplicity comes with a slightly higher rate at 7.9%, though there isn’t the variance in the rate you’ll be offered that you get with the Sainsbury’s card. An added benefit of the Simplicity card is that the spending you do on it will see you earn Reward Money as part of the Barclaycard Freedom scheme. That Reward Money can then be spent directly with participating retailers such as Shell, Pizza Express, npower and Halfords.
Personally, I think I prefer the Simplicity card.
Capital One Click Card
Finally, there’s the Capital One Click Card, a card designed for people that do a lot of shopping online. Using the card will see you get discounts at places like Ted Baker and Zavvi, but most important of all purchases and balance transfers will enjoy a rate of just 9.9%.
The right card for you
If you can clear your debt within the 0% period on offer, then of course an interest-free balance transfer card will likely by your first choice. For a full run down on the best 0% balance transfer cards, read Credit cards from the best 0% balance transfer providers with low fees.
But those cards are not for everyone. If you don’t fancy applying for new cards every couple of years, and instead just want a simple card with a nice, low rate for life, then a low APR card should be on your radar.
More: Compare credit cards | 30 affordable gifts that you won't find on the high street | How to retire early
Most Recent
Comments
-
I'd have found the article more interesting with some numbers to back it up. You say you can pay off £1500 over 15 months on a 0% card at £100 a month. Makes sense. But £5000 isn't achievable in the same timeframe. Also makes sense. But for the article to be meaningful in any way at all, how much would you have to pay in total with that £5000 paying £100 a month: (1) 0% for 15 months, then a 3% fee to transfer to a different 0% card for another 15 months, and so on until it's paid off; (2) 0% for 15 months, then 19% a year until it's paid off (ie. assuming you couldn't get another 0% card); (3) 7.9% until it's paid off. (1) is still obviously the best option. (3) is probably better than (2) or so I assume without working out the maths - but shouldn't the result of that maths have been part of the article? If it's not better, why on earth would you want a "low rate" card, ie. what's the point in the article? Ultimately, "If you don't fancy applying for a new card every couple of years" then you're throwing away money. Isn't that the truth of it?
REPORT This comment has been reported. -
Unfortunately many people have very little choice but to live beyond their means when life is so expensive and salaries are so low (as more and more wealth is diverted to the rich). House prices are not astronomical because people wanted to borrow large sums of money but because they were able to and had no choice - what's the alternative to a big mortgage these days, living in a tent? And Gordon Brown is neither here nor there when the main sub-prime mortgage problem stems from the United States. Also, given that governments have been running deficits for the past couple of hundred years, I'd suggest that the credit based economy, rather than being 'the problem' is actually an essential feature of capitalism. The present sovereign debt crisis is not caused by high debts (national debts as a % of GDP have been far higher in the past) but by a lack of confidence on the part of the market. These things are cyclical and I dare say this crisis will go the way of others in the past. Running out of fossil fuels is an actual material event and that is going to cause far more problems.
REPORT This comment has been reported. -
@Ken Rich you are wrong when you say "The whole world is in financial problems due to governments constantly borrowing money and living beyond its means" The problem is PEOPLE living beyond their means, governments (especially in the UK and USA) exacerbated the problem by encouraging people to borrow, famously Gordon Brown's response to questions about the ridiculously high price of houses was 'Mortgages have never been more affordable with low interest rates." and people kept borrowing until the point at which they could no longer repay their debts. THAT is what brought down the banks, that attitude is still prevalent and will cause more people to borrow too much and default.
REPORT This comment has been reported.
Do you want to comment on this article? You need to be signed in for this feature
22 December 2011