The 0% Credit-Card Traps!

If you don't play your cards right, a 0% balance transfer could end up costing you hundreds of pounds. Here's how.

If you want to have some fun with credit cards, try playing the 0% game. In brief, there are three simple ways to play:

1. Enjoy interest-free credit on your spending for up to a year with a '0% on new purchases' credit card.

2. Transfer your existing credit- and store-card debts to a '0% on balance transfers' card.

3. Do both with a '0% on balance transfers and purchases' card.

Note that you should never go shopping with a 0% balance-transfer card, as 99% of the time, you'll be charged interest on any purchases at your full standard rate, which is likely to exceed 16% APR. Ouch!

Furthermore, 0% credit cards have another sting in the tail to look out for. If you fail to make a repayment on time, or miss one altogether, the majority of credit-card issuers will cancel your 0% deal. In other words, a single late or missed repayment could see the interest rate on your debt leap from a tasty 0% to, say, a terrible 20% APR!

Although this may seem to be a severe penalty, you have to remember that 0% balance transfers are a big loss-leader for card issuers. Indeed, industry estimates put the cost of 0% deals at £600 million to £1 billion a year. Therefore, card issuers can't afford 0% 'rate tarts' to step out of line, which explains their tough treatment of bad payers and defaulters.

Happily, there is an easy way around this problem. When setting up a new credit card account and arranging any balance transfers, be sure to create a direct debit or standing order at the same time. As you're not paying any interest, there's no sense in paying more than the minimum monthly repayment. So, only pay the MMR and keep your spare cash in a high-interest savings account. If necessary, you can use these set-aside sums to reduce your balance when interest eventually kicks in.

One final word of advice: when arranging a 0% balance transfer, be sure to find out how much the handling fee will be. Typically, you can expect to pay an upfront fee of 2% to 3% of the value of each transfer, although there are around half a dozen 0% transfer deals lasting up to six months which don't charge fees. Additionally, check whether any fee will be treated as a retail transaction -- if it will be, then interest will be charged on it.

Also, keep your eyes peeled for new rules, because the 0% game keeps changing all the time!

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