Pay Attention, But Don't Pay Any Interest!

To become fantastic with your plastic, learn these rules of the 0% credit-card game. You could save hundreds of pounds each year.

Did you know that the longer side of a credit card measures about 85mm? This means that if you lined up the UK's 74 million credit cards end to end, they would stretch 6,290 kilometres, or roughly 3,930 miles, which is close to the distance from London to Chicago!

The other astonishing thing about credit cards (apart from the sheer number of them in circulation in the UK) is just how expensive they are. Earlier this month, the Bank of England raised its base rate to 4.75% a year, yet a typical credit card charges an annual interest rate of 15.5% on purchases.

Thus although the UK's big banks can borrow from the Old Lady of Threadneedle Street at under 5% a year, they prefer to charge us mere mortals over 15% a year. This sure sounds like a guaranteed way to make money!

However, there are several tricks which determined borrowers can employ to minimise the amount of interest which they pay to credit-card companies. Believe it or not, it's possible to reduce your interest bill to zero -- and keep it that way until your entire debt is paid off! Without further ado, here is my three-step guide to avoiding interest and making the most of your credit cards:

The no-cost way (0% on spending cards, plus fee-free 0% balance transfers)

If you don't pay off your credit card in full every month, you'll be forced to pay interest at a typical rate of, say, 1.2% a month. Hence, a balance of, say, £3,000 will cost you £36 a month in interest which, thanks to the power of compounding, adds up to around £462 a year. At least, that's the theory, but this hefty interest bill can be eliminated with a little effort.

The first way to beat the system is to make all of your purchases on a credit card which offers interest-free credit on spending for an extended period. For example, the GE Money Transformation MasterCard charges no interest on purchases for a year, which allows you to enjoy a year's interest-free spending before the rate reverts to 12.9% typical APR. Another Best Buy card for interest-free spending is the Sainsbury's Bank Visa, which offers 0% on purchases for ten months, then 15.9% typical APR.

The next step is to kill the interest bill on your existing credit cards by transferring your existing balances to credit cards which offer introductory 0% balance transfers.

To do this, apply for a 0% balance-transfer card and provide your new card issuer with details of the debts which you'd like to switch. It will then send a credit to your existing card issuer by cheque or via payments system BACS, leaving your old account with a zero balance. Your new account now has a negative balance, but, of course you don't have to pay any interest for an extended period, thanks to the 0% transfer rate.

If you're prepared to surf your debts from one 0% transfer deal to another every six months (and thus be a "card tart"!), then the following firms offer no-fee 0% balance transfers lasting six months: Marks & Spencer & More, Norwich & Peterborough BS, Post Office, Stroud & Swindon BS Advantage and Ulster Bank.

Once you've transferred debts to a 0% transfer deal, be absolutely sure not to spend on this card, as you'll normally pay interest on this spending at the full standard rate of interest. The exceptions from the list above are the Post Office and Ulster Bank, which offer 0% on transfers and purchases for six months. Hence, you're better off enjoying 0% on spending for ten months with a Sainsbury's Bank Visa.

The low-cost way (0% balance transfers with fees)

However, if you can't be bothered to keep applying for a different no-fee 0% card every six months, then you can enjoy much longer 0% deals by paying a fee for each balance transfer. Here's a list of twelve-month 0% transfer deals, courtesy of independent financial researcher Moneyfacts (which powers the Fool's search engine for credit cards):

Best Buys for 0% balance transfers (with transfer fees)

(Capital One offers 0% on transfers for eighteen months with a 2% fee, but this deal requires you to spend £100 on your card in the first three months, which will attract interest at 15.9% typical APR.)

Note that the only Best Buy 0% card with an upper limit on transfer fees is the GE Money card, which is capped at £50 per transfer. However, for individual transfers of less than £2,500, Virgin, Sony and MBNA are the winners. For individual transfers of more than £2,500 apiece, GE takes the honours.

The simple way (low-rate lifetime transfers)

If you can't even be bothered to switch your balance once a year, then the lazy way out is to transfer your credit- and store-card debts to an ultra-low interest rate for life. Here are four of the table-topping deals for no-fee lifetime transfers:

Best Buys for lifetime balance transfers (no fees)

Again, once you've transferred debts to these cards, never spend on them -- unless you want to pay interest on your purchases at the full standard rate.

Finally, I hope that this article about lowering your interest managed to hold your interest!

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