The 0% deals on balance transfer credit cards are now so good you can use them to actually make money!
Balance transfer cards are a useful way to clear existing debt on your credit card. But the incredibly long interest-free periods that are currently available give you the opportunity to actually earn lots of interest on your debt – far more than you pay in transfer fees.
In fact, by choosing to pay your debts off more slowly than you wanted to, you can earn even more.
How it works
Let's say you have a £1,500 debt on a typical credit card and you repay £100 per month. You'll clear the debt in 18 months and pay more than £200 in interest.
However, if you take out the NatWest/Royal Bank of Scotland Platinum MasterCard, you can pay 0% interest for 26 months. There is an up-front fee of 2.65%, which is less than £40 on a £1,500 debt.
You've paid more than £160 less and you have an extra eight months to clear the debt just in case.
The clever bit
But that's not all. If you choose to repay the minimum instead of the £100, and save the difference in a top savings account, you could earn back almost double the cost of the fee.
[SPOTLIGHT]In other words, by choosing to borrow for longer and to earn interest on that borrowed money, you make a profit on that debt even after paying a fee. Instead of paying nearly £40 per £1,500 borrowed, you earn around £35 per £1,500 borrowed. That's after deducting the fee from the savings interest you earn on that borrowed money.
There are few ways to borrow at such low cost and to get a guaranteed investment return from it, and this is one of them.
How the longest 0% deal compares
There is a 0% deal that lasts even longer than the NatWest/RBS card. However, the Barclaycard 27 Month Platinum Visa offers just one extra month and it costs substantially more: the fee is 3.5%. As a result, you're likely to be better off with the 26-month deal.
You might also be wondering how the maths works out if you go for a shorter balance-transfer card with a very small interest rate, such as the Halifax All In One Online MasterCard, offering a 15 month 0% deal with just a 1% fee. You can read about the lowest-fee cards in The best low-fee balance transfer credit cards. By my calculations, the NatWest/RBS card still works out better than all these cards.
Those with larger debts benefit even more
If your debts are too large to pay off in full by the end of the deal, you'll benefit even more by choosing to pay off your debt more slowly, saving the difference, and paying off as much as you can before you start shopping around for a new deal.
If you're looking to pay down £100 per month on a £3,000 debt for example, you'll save considerably more than £500 in two years. That's compared to paying a typical credit card rate and not saving anything.
If you're in this situation, though, you need to think a little bit more before going ahead. You must consider whether it will be difficult to get another new cheap deal at the end of this one and whether there will still be a lot of debt outstanding.
If you suspect your income or debt situation will be worse, for example, you might want to take a personal loan instead, if you can get one at a low enough interest rate.
The two most important rules
Always repay the minimum required every month, even if you have a 0% deal. Miss a repayment and your provider will remove your 0% deal from you. Sometimes a call to say it was just a one-off, forgetful mistake, will see your 0% deal reinstated, but you'll still be fined £12 and receive a bad mark on your credit record. You can get a free trial with Credit Expert to see what your credit looks like thanks to Lovemoney.
Also, you must take measures to repay more than the minimum amount. This means you either repay more than the minimum each month or you save extra in order to pay down the debt before the deal expires. If you don't do either of these things, the cost of your debt in the long run is likely to be extremely high.