Avoid these bad balance transfers!

Beware of 0% transfers to your existing cards, as these are usually awful.

Thanks to the Bank of England's base rate being stuck at 0.5% a year for the past 31 months, banks are able to borrow very cheaply. As a result, mortgage rates have dropped to the lowest levels ever seen, with the safest borrowers now able to borrow at fixed or variable rates below 2% a year.

The great card con

Alas, despite the rock-bottom base rate, credit cards have become more, not less, expensive. Today, credit-card rates are the highest since 1998, when the base rate was as much as 7.5% a year.

In the three years since British banks teetered on the brink of a financial abyss, the rates charged by credit cards have soared. In fact, a typical credit card now charges an average rate on purchases of over 19% APR, which equals 38 times the base rate.

In short, our plastic has become one ridiculous rip-off!

Kill your interest bill

A yearly interest rate of 19% is a mighty expensive way to borrow. Indeed, thanks to interest alone, it doubles your debt every four years.

Frankly, you'd have to be bonkers to borrow at such extortionate rates, which is why so many cardholders are making use of 0% balance transfers. This involves moving your existing credit and store card debts to one of dozens of cards offering extended interest-free periods on balance transfers.

However, this isn't a free lunch, as you will have to pay a transfer fee of around 3% of the value of each transfer. Transferring £2,000 to a 0% deal will cost you perhaps £60 upfront. However, this amounts to roughly two months of standard interest, which is a small price to pay for up to 22 months of interest-free credit!

Bad balance transfers

As a 'card tart', I have amassed a decent deck of credit cards over the years. As a result, hardly a week goes by without one card company or another offering me a balance-transfer deal as an existing cardholder.

However, these 'special offers' for 0% transfers go straight in the bin, because they are always inferior to the best deals on offer in the wider market. Here are two examples of recent 0% deals that I declined:

1.     0% for nine months

Earlier this month, Halifax offered me 0% for nine months on balance transfers of £100 or more, with a fee of 3%. A 3% upfront fee for a nine-month 0% deal works out at an effective interest rate of roughly 7.2% APR (annual percentage rate). In other words, this 3% fee is equivalent to an interest rate of 7.2% a year, which is far too much to pay for a short-term 0% deal.

2.     0% for nine months

Last month, MBNA offered me 0% for a year for a 3% fee, which is three months longer than above offer from Halifax. This reduces the effective interest rate to 5.5% APR, which is a bit better, but still not great.

Britain's best balance transfers

To show you why you should ignore these 'special offers' from your current card issuers, here are five of the best 0% balance transfers on offer today:

In the third column of my table, I've shown the transfer fees for each of these 0% deals, plus their equivalent APRs. As you can see, the cheapest deal (based on the lowest fee for the longest deal) is the Barclaycard 20Mth Platinum Visa, which offers 0% for 20 months for a reduced fee of 2.6% (2.95% APR).

Calculating APRs is very tricky and generally not something to try unless you've studied degree-level maths. Hence, a much easier way to compare 0% transfer deals is to divide the transfer fee by the length of the deal. Here are the results for the five 0% offers shown above:

Once again, the winner is the Barclaycard 20Mth Platinum Visa, with a transfer fee of 0.13% a month. That's a lot better than paying 1.5% a month in interest, agreed?

In summary, ignore the inferior 0% offers from your current credit cards and bag a Best Buy balance transfer today!

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