Two tasty balance transfer deals

The pros and cons of the top two interest-free balance transfer cards available right now.

The launch of a market leading credit card always gets us finance hacks excited, so when Abbey announced its latest offering, it certainly caught our attention.

According to Abbey, balance transfers are still big business, and over three million of us plan to shift more than £7 billion of debt over the coming months to take advantage of them.

So, following on from the success of its Zero card, the new Abbey credit card offers 15 months' interest free on balance transfers, together with 0% for three months on new purchases.

The bank now says it offers the best credit card on the high street. But does it really live up to its claims?

Battle of the plastic

As many of you already know, the Virgin Money MasterCard has long held the top spot in our best buy tables, and though it's not a 'high street' brand, in all other ways it operates in the same way.

So how do the two cards compare? Here's a quick snapshot:

Calculating the cost

One of Abbey's biggest selling points is its APR - and at 15.9%, it's nearly one percent lower than Virgin's 16.6% APR.

APRs are obviously an important factor for anyone except those who pay their balance in full each month. However, the APR on both cards only kick in once the 15 months at 0% are up. At this point, if you're savvy, you'll simply transfer any remaining balance on your card to another 0% card, and avoid paying any interest at all.

But let's say you don't do this, for whatever reason, and instead you stick with your chosen card for more than 15 months. Using a credit card calculator, I worked out that if you paid £200 a month towards a £5,000 debt (plus all fees) on a Virgin credit card, it would take you 26 months and cost £143.04 in interest before you cleared the debt.

With the Abbey card, it would take the same amount of time and cost £136.42 in interest.

Personally, I think the £6.62 extra in interest you'd pay to Virgin is unlikely to break the bank. Even if you could only afford £100 a month, you'd only pay £73.11 more in interest over the five years it will take you to pay off the debt - and again, that's only if you're not savvy enough to transfer to a better deal when the promotional rate ends.

Getting your credit in order

This difference in APRs becomes even less significant when you focus on one other big pitfall of credit cards - negative payment hierarchy.

Providers which operate negative payment hierarchy allocate any payments you make towards your cheapest debts first. This means if you took out a 0% transfer deal, then made a purchase which attracted a rate of 15.9%, any payments you make towards your credit card debt would pay off the balance transfer first, leaving your purchase to rack up high rates of interest.

With Abbey offering only three months interest-free on purchases, just one trip to the shops could mean you end up paying twelve-months unnecessary interest on what you thought was a harmless purchase.

You may think that Virgin, which offers six months' interest free on purchases, isn't much better. However, as we highlighted last year, when balances attract the same rate of interest, Virgin allocates your payments towards the 0% offer which ends first.

This may seem like a small mercy, but it's also a useful one, as it means you can spend to your heart's content during the first six months, knowing that as long as you pay off the new debt you're racking up before the six month promotional period is up, you won't pay a penny in interest.

Money talks

One other perk which Virgin offers that Abbey doesn't is money transfers, where instead of transferring a balance from one credit card to another, you can move part of your credit limit as cash into a nominated bank account.

This is a very useful feature if you have an overdraft or loan you need to pay off, and in my opinion it makes Virgin and MBNA stand out from the rest.

However, if you want to take advantage of this offer, you'll have to fork out a slightly higher fee of 4%. For a cheaper way of doing this, Egg's Visa Card also offers this feature, and charges a slightly lower rate of 3% (though you only get 14 months interest free on BTs, so one month less than Virgin).

Despite Abbey's drawbacks, I still think it's a great offer. And those who have grown to loathe Virgin's parent MBNA for its interest and minimum payment hikes will no doubt be grateful for the breath of fresh air Abbey brings to the market.

However, if you are tempted, you should only use the Abbey card for balance transfers, and not to make purchases, or you could end up paying a wad of unnecessary interest.

There is no doubt Abbey's offering provides a useful tool when used right. But at the end of the day, I think it will take a little more to usurp Virgin's crown as the market leader.

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