Smarter Balance Transfers

Beware the deal that is not all it seems; some of our flexible friends hide expensive secrets.

If I were to ask how many Foolish readers have effectively made money from their credit card, I reckon the answer would be quite a few. After all, with the advent of the 0% balance transfer deal, 0% card for new purchases and the humble cashback card, there are many ways to make a quid or two from your flexible friend.

Balance Transfer Fees

However, those days appear to be numbered. Lenders have become increasingly unhappy about the losses they have incurred from 0% credit cards and bad debts - so to compensate they introduced the balance transfer fee. Essentially, this means that should you wish to take advantage of a 0% offer, you will have to sacrifice at least 2% of your saving as a charge to your provider.

So, should you wish to transfer £1,000 to a 0% card, your provider will charge £20. Of course, if you had transferred that debt from a card charging 20% APR to a card offering 0% for 12 months, you'd have saved nearly £112 in interest over the year. So even with the £20 fee you'd still have ended up with over £90 extra in your pocket (although you may decide it is less worthwhile transferring smaller sums). So balance transfer fees, although annoying can still be worth paying for the potential saving to be made.

Cards with no Balance Transfer Fees

According to Moneyfacts there are still cards available with no fee: Britannia BS Classic Intro Visa, Britannia BS Platinum Intro Visa and Sainsbury's Bank Advantage Visa. However, all of these cards offer 0% periods of five months, as compared to the current maximum of 12 months, so you need to do some maths to figure out which one saves you the most.

Uncapped Balance Transfer Fees

All seems pretty straightforward so far, doesn't it? Well, let's introduce our new foe: the uncapped balance transfer fee. Whilst balance transfer fees used to have a specified maximum (typically £50) regardless of the amount you transferred, nowadays you'll find a large number of providers stipulating no cap at all.

For example, currently sitting atop the Moneyfacts Best Buy balance transfer card table is the GE Money Transformation card, with an offer of 0% for 12 months. However, look closely and you'll see that it has a balance transfer fee of 2.5%, with no maximum charge. Transfer £5,000 and you'll be stung for £125. What's more, some cards are charging an uncapped 3% - so you could potentially lose £150 with the same transfer. Cardholders hoping to transfer larger sums should thus check the small print carefully, and preferably find a card offering a similar deal with a capped (or indeed no) balance transfer fee.

Beware the Payment Allocation

And there's yet another enemy to contend with - how your money is used. Whilst balance transfer fees aren't ideal, they are at least relatively straightforward to understand. Provided you fulfil the provider's conditions, you could currently transfer your debt to a card offering 0% for a shorter period of time for no fee, and a longer period of time for a varying charge - just check the details of the balance transfer.

But what about those cards that offer 12 months 0% for balance transfers and 3 months 0% for introductory purchases? Sounds great, doesn't it? Transfer that balance and pay no interest, plus get 0% on anything you buy, too. Unfortunately, it's not such a great deal. It all depends on how your payments are allocated.

We all know that to get out of debt we should tackle the fastest growing one first: i.e. the most expensive one. Unfortunately, many card providers realise that by doing quite the opposite they can squeeze some extra cash out of us - and so utilise what's known as negative payment hierarchy.

Imagine you have transferred a £1,000 debt to a card offering 0% on balance transfers for 12 months, and 0% on new purchases for 3 months. You then swiftly spend another £500 on the card. Although everything will be fine for the first 3 months, as your debt will earn no interest, things could become very different in month 4 if your card operates a negative payment hierarchy.

Essentially, any payments made to the account would be assigned to the cheapest debt first. So although you would assume that by paying £500 you would be covering your £500 new spend balance, that money would instead typically be used to pay off (in the following order):

Insurance premiums, such as card protection
Interest
Charges or fees
Balance transfers or promotional transactions (those with the lowest interest rates first)
Retail purchases
Cash transactions

Before you can get to start attacking those new purchases you have to pay off the balance transfer - which wasn't even accruing interest in the first place! So the moral of the story is - if you're going to transfer a balance to a card operating negative payment hierarchy, cut it up and do not use it.

And watch out for the small print

Another finally, another thing to check is the terms and conditions, hidden away in that pesky small print that no one ever reads. For example, Capital One is currently offering a Platinum card (by invitation only) that is giving 0% on balance transfers for a whopping 18 months, with 0% on new purchases for 3 months. Sounds fine - we've learnt our lesson there, so as long as you avoid spending any money on the card, you won't accrue interest, right?

Unfortunately, things aren't that straightforward. Further investigation reveals that to benefit, you must spend at least £100 on the card in the first 3 months. With an APR of 15.9%, a £500 spend could accrue £100 in interest in the following 15 months. And if you don't comply with this spending stipulation, your 0% deal is cut to just 6 months, making it far from competitive. What's more, some lenders even class the balance transfer fee itself as a new purchase, so you can be stung there too!

So before applying for a new credit card:

Check the details of the deal. Try to find a card with a capped (or no) balance transfer fee - this is most important for larger transfers.
Check the terms and conditions carefully for any extra clauses.
Does the provider operate a negative payment hierarchy? If so, transfer the balance and cut up the card.

Spend a bit of time working out how much you will save with each card, taking into account its fees and stipulations. You could save yourself a fortune!

Search and compare credit cards onlineat the Motley Fool.