Beware Of Bad Balance Transfers!

You can save a fortune by transferring expensive debts to a 0% credit card. However, watch out for 0% deals with stings in the tail.

With the Bank of England's base rate unchanged since last August at 4.5% a year (rather low in historical terms), British borrowers should be enjoying low, stable interest rates.At least, that's the theory! In practice, borrowing costs are rising, because many credit-card companies are raising their standard rates of interest, as I warned in The Great Rate Fiddle and savings rates are being cut, too.With the average annual interest rate on credit-card purchases being over 15.5% APR, one way to hit back at rising interest rates is to transfer your balances to a cheaper credit card. Indeed, the ultimate money-saving approach is to switch your existing debts to one of the dozens of cards which charge no interest on balance transfers for an introductory period.For example, according to the Moneyfacts database, these are the top five Best Buy 0% cards for balance transfers:CardLength of 0% deal(months)TransferFeeTypical APR (%)on purchases Halifax One12From £2 to £5015.9Marbles Internet9From £5 to £5014.9Abbey9From £2.75 to £5015.9SonyCard9From £3 to £5015.9Virgin Credit CardBT Option9From £3 to £5015.9However, before you rush off to slash your interest bill to zero, you need to watch out for these three pitfalls, because choosing your perfect plastic is more complicated than you'd imagine:1) Balance-transfer feesThe first problem can be seen in the third column of the above table: fees of 2% per transfer. Transferring a balance of £2,500 to any of the above cards would generate a transfer fee of £50, which eats into the saving you make by grabbing a 0% deal. However, paying a fee of £50 to transfer a balance of, say, £10,000 works out to just 0.5%, which is a small price to pay to enjoy up to a year's interest-free credit!Even worse, several other 0% cards don't have a cap on their transfer fees, so a 2% fee on a £10,000 balance would amount to a whopping £200. Hence, be sure that you check that you're not paying an uncapped transfer fee -- otherwise it could cost you dearly!2) 0% on transfers, but high rates on purchasesAlthough the above cards can save you a fortune on balance transfers, none of them are suitable for taking shopping. That's because the above 0% deals only apply to transferred debts, so when you spend on these cards, these transactions incur interest at the standard rate for purchases, as shown in column four of the table. (Some of these cards do offer limited 0% on purchases deals, but they don't last as long as the transfer deal.)What's more, any repayments to the above cards go towards paying off your 0% debt first, so you end up paying interest of between 14.9% and 15.9% APR on all of your spending. This is known as a negative payment hierarchy, and the way around it is simple: don't spend a penny on any of the above cards they're only to be used for balance transfers! If you do want a 0% card for shopping, the Sainsbury's Bank Visa card tops the Best Buy tables at 0% for ten months on purchases.3) Late-payment feesSlip up and miss a payment and you'll be hit by a late-payment fee of anything up to £25. What's more, in some cases, you could lose your 0% deal and find yourself paying a sky-high standard rate of interest on your transferred debts. Ouch! To avoid this trap, set up a Direct Debit or standing order for your minimum monthly repayment, usually 2%+ of your outstanding balance.In summary, there is no single Best Buy credit card for multi-purpose use. To be a smart card player, you need to adopt a pick 'n' mix approach, choosing various Best Buys to suit different needs. If you try to use a single card for borrowing, spending and overseas purchases (the Nationwide BS Classic card is the outright winner abroad), you'll mess up -- I guarantee it!More: Check out the delightful deck in our Credit Card centre | How Credit Cards Rip Us Off!