How To Avoid Paying Interest On Your Debts

Cliff D'Arcy takes a look at how you can avoid paying interest on your credit card debts.

Until the mid-Nineties, if you had owed money on a credit card, then you only had one option: pay off this debt as soon as possible. However, in the second half of the Nineties, balance transfers made this a whole lot easier.

Here's how balance transfers work: let's say that you have a balance of 2,000 on your CostlyCard, which charges a yearly interest rate of 20% APR. You decide to apply for the new BargainCard -- a 0% balance transfer card -- which charges 0% on debts transferred from other credit and store cards. You instruct BargainCard to send 2,000 to CostlyCard, which clears this debt. Thus, you now owe BargainCard 2,000, but have a zero balance on your CostlyCard.

In the first few years of balance transfers, card issuers would offer new (and some existing) cardholders low-rate deals. They would charge a modest interest rate on transferred balances -- 5.9% APR seemed to be popular, I remember. However, this game changed forever on Christmas Day 2000, when online bank Egg launched the UK's first 0% balance-transfer deal.

Unsurprisingly, the thought of avoiding interest for six months appealed to those in debt, so large numbers of cardholders transferred their existing balances to Egg. Of course, other card issuers followed in Egg's footsteps and, these days, you can choose from scores of different 0% offers.

However, before you rush off to start enjoying a lengthy interest-free period on your existing debts, you need to hunt down four key pieces of information:

1. How long the 0% deal lasts

Of course, the longer an introductory interest-free deal lasts, the better. The shortest 0% balance transfers last for six months, but the longest last 12, 15 or even 18 months. However, the longer the deal, the more likely your new card is to charge a transfer fee, which leads us onto

2. How much the transfer fee is

Until two years ago, almost all balance-transfer offers were fee-free. However, in August 2005, Barclaycard started charging a transfer fee based on the value of each transfer. Nowadays, almost all cards charge a fee of 2% to 3% for 0% transfers. Thus, a 2,000 transfer will attract a fee of 40 to 60. Note that some sneaky card issuers class this fee as a retail transaction and charge interest on it at standard rates, so watch out for this devious trick!

3. Whether you can also spend at 0%

All but a handful of credit cards operate on what is known as a 'negative payment hierarchy'. What this means is that your monthly repayments go towards paying off your cheapest debt first. So, if you make a 0% transfer to a card and then start buying new purchases with it, then you will build up debt that you will have to pay interest on.

What's more, most card providers will not allow you to repay this interest-bearing debt until your entire existing balance is cleared. So it makes sense to take out one card for balance transfers and another for 0% spending. However, if your card offers 0% interest on new purchases for the same length of time as it does for 0% transfers, then you won't fall into this trap. However, make sure that you don't overspend on 0% new purchase cards, as this debt still has to be paid off someday...

4. Penalties for missed or late payments

You should know that card issuers will charge you around 12 a time for each late or missed payment. Therefore, to avoid these penalties, be sure to set up a direct debit or standing order for your minimum monthly repayment. By doing this, you can dodge these punitive fines.

Finally, to check out the latest interest-free offers, then visit Fool.co.uk's credit card centre and find out how much you could save by switching cards, today!