Transfer balance to 0% and dodge the fee!

Find out the real cost of balance-transfer fees, and learn how you can TRULY borrow for free!

Credit-card companies are more sneaky than Gollum. By promoting 0% balance-transfer cards in huge letters and burying the fee, they deceive people into thinking the cards are totally free until it's too late.

Most lovemoney.com readers won't fall for that old trick, but in addition the fees themselves are deceptive and make the credit cards difficult to compare with standard deals that charge interest. I'm going to show you why, and how you can offset the fee completely, so you actually pay nothing!

The true cost of the fee

Typically, we are charged a fee of 2-3% on debts transferred to credit cards in return for 0% interest for an agreed period. However, when you pay the fee, you pay the whole of it up front on the entire balance. Compare this with paying interest: when you do that, you pay the APR (annual percentage rate) over a year, not up front. To put this another way, you pay less than 1/12 of the interest rate in the first month, and even less in following months, assuming you're steadily paying off your balance.

So a 2% fee does not equal 2% APR. Take a look at this table:

Balance-transfer fees expressed as interest

(This is based on a transfer that is fully repaid in equal instalments by the end of the 0% deal.)

Source: M&S Money

This table show that, if you pay a fee of 2% and clear your balance steadily throughout the introductory period, it's the equivalent of paying interest at about 4-7%. For a credit card with a 3% fee you'll pay the equivalent of around 6-11%. The shorter the deal and the higher the fee, the higher the equivalent interest rate.

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Pay off credit card debts

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Even so, these figures are still better than the default interest rates on your average credit card, which is shockingly high at around 16%. The interest rates above are more comparable with unsecured personal loans, which you can get for 6% or 7% at present, or to lifetime balance-transfer cards.

Also, as you'll see, a 12-month deal with a 2% fee is a bit like paying 3.7% interest, which is virtually unbeatable. However, there is a way to offset even this small amount, and perhaps even make a profit from your borrowing.

Pay truly nothing on your balance transfer!

There is a way to totally wipe out the cost of the fee, so that you really do pay nothing. What you do is you don't pay off the balance in equal instalments. Instead, you just make the minimum monthly repayment to the credit card, and you put the difference into a savings account. One month before the introductory deal expires, you transfer the money back into your current account and then pay off the debt completely.

This is known as stoozing and you can find out more about it by reading The ultimate guide to stoozing on lovemoney.com.

Running some quick figures, I see that for a basic-rate taxpayer who saves into a market-leading ISA should make about £100 with a 12 month/3% fee card.

Take a look at The ultimate guide to stoozing if you want more detailed figures!

More: The top cards for stoozing
This article was updated in May 2010 from an earlier version published in 2007.