0% Transfers Still Make Sense!
With 0% balance transfers, you can wipe out your credit-card interest bill. However, some deals aren't what they used to be...
If your credit card debts are becoming something of a burden, then it makes sense to slash your interest bill to zero. Obviously, wiping out any interest gives you a valuable breathing space and helps you to bring forward your debt-free day.
So, how do you go about this? Easy: you simply move your existing debts to a credit card which offers 0% balance transfers for an extended period. For example, a 0% balance-transfer deal lasting twelve months means that you can avoid paying interest on transferred debts for an entire year.
However, as with all sports, it pays to learn the rules before rushing in. Indeed, if you don't play your cards right, then you could be worse off than before. To help you to become a balance-transfer winner, here's is a brief history of the 0% game:
Balance transfers, past and present
On Christmas Day, 2000, online bank Egg launched the UK's first 0% balance transfer credit card, which lasted for six months. Egg's rivals scrambled to follow suit (groan!) and, by 2004, there were dozens of 0% deals to choose from. Alas, 2004 was the year when card issuers first changed the rules, by introducing transfer fees.
Initially, these fees were capped at, say, £50 per transfer, but most Best Buy transfers now include an uncapped fee. Typically, you should expect to pay a levy of 2% to 3% of the value of each transfer. Thus, to shift £3,000 of plastic debt, expect to pay fees totalling £60 to £90.
The good news is that the length of interest-free deals has increased in recent years. Two years ago, 0% deals lasting up to nine months were the norm, with Best Buys lasting for twelve months. These days, the top 0% deal lasts for fifteen months, with numerous cards offering a breather lasting twelve to fourteen months.
What's more, credit-card issuers have also tightened their credit-scoring, partly in response to the worldwide credit crunch which began last summer. Thus, `easy credit' is now harder to get, with lenders offering lower credit limits to successful applicants.
This week, Capital One has broken ranks by launching a no-fee 0% balance transfer. However, this deal lasts less roughly six months (until 1 August 2008), as the following table shows:
Card0% transferperiodFee for £3,000transfer (£)Monthly repaymentto avoid interest (£)Virgin Money MasterCard
15 months
89.40
(2.98%)
205.96
Egg Credit Card
15 months
90.00
(3%)
206.00
BarclaycardPlatinum Credit Card
14 months
87.00
(2.9%)
220.50
Capital One Bank
Platinum Balance Transfer M'Card
To 01/08/08
Nil
500.00
Source: Moneyfacts, 14/02/08
As you can see, although Capital One's 0% transfer comes with no fees, it lasts for only six months. Thus, to repay a balance of £3,000 over this period would require monthly repayments of £500. This is a tall order for most people, so it usually pays to cough up a fee in return for a longer deal. For example, the table-topping Virgin Money MasterCard charges a fee of 2.98% but offers 0% for fifteen months, reducing the monthly repayment to avoid interest to a mere £205.96.
In addition, there are four things you must do in order to make the most of 0% credit cards:
1.Don't use a 0% balance-transfer card for spending
If you pay for purchases using a 0% transfer card, then expect to pay interest on these transactions at the full standard rate, say, 16% APR or more. If you need a card for shopping, then use a Best Buy 0% on new purchases card instead.
2.Don't miss a repayment or pay late
If you don't pay on time, or miss a repayment, then you will be fined up to £12 per offence. Even worse, your 0% deal may be withdrawn, leaving you paying high rates of interest on your entire balance. Ouch!
3.Don't buy rip-off payment protection insurance Payment protection insurance (PPI) meets your repayments if you are not working due to an accident, sickness or unemployment, and pays off your balance if you die. Alas, it is massively overpriced, and typically adds a tenth (10% a year) to the cost of servicing your credit card. Just say no to PPI and put the additional saving towards repaying your debt faster!
4. Don't pay interest when your deal expires
Make a note of when your latest 0% deal ends and plan ahead for a replacement. Give yourself four to six weeks to line up a new credit card. Otherwise, you could end up paying interest on your debt, which would spoil the fun of being a `rate tart'!
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