Three reasons not to get a 0% card

Don't get tempted by interest-free cards - for some borrowers, there is a better choice.

There was a time when many of us would put all of our spending on our credit cards. Not any longer, apparently.

According to the Payments Council, the body which tracks how we spend our money in the UK, Brits are finding alternatives to spending on their credit cards. It found that in the second quarter of 2010, spending on credit cards increased by just 3.9% - barely ahead of inflation – compared to far more significant increases in the use of debit cards (up 12.4%) and online Faster Payments (up 67%).

Perhaps the reason so many of us are trying to spend our money in other ways is because of just how much debt we already have built up on credit cards. Back in July, the latest figures available, the total national debt on plastic was a frankly astonishing £58.4 billion.

A 0% escape route

If you have some debt on your credit card, the obvious way to clear it as cheaply and painlessly as possible is to make use of a 0% credit card.

This type of card will offer you a set period of 0% interest on your debt, allowing you to break your debt down into far more manageable chunks. What’s more, there are some seriously long interest-free periods on offer, with the market-leaders currently offering 16 months.

Six great 0% BT cards

Three reasons 0% cards are not for everyone

Now that’s great for a modest debt, but what if you don’t manage to clear that balance within the 0% interest period? If you’ve still got a balance on the card that you need to pay off, you face something of a quandary:

1) You don’t want to leave the debt on that card, as the interest you’ll be paying will rocket from nothing up to around 19% - and that interest will soon add up.

2) It might be difficult to transfer the balance to a new card at this point. You'll have to go through the rigmarole of finding a new card to transfer the debt to - and if the credit card market has become uncompetitive or your credit rating has deteriorated over thsi period,  you may have a seriously reduced range of options by this point.

3) You'll have to shell out another 3% fee. Remember, that's 3% of your outstanding debt, which immediately gets added to your balance. By contrast, you pay the APR over a year, not upfront. So what seems like a small fee actually translates into quite a high APR, as this table shows:

Balance-transfer fees expressed as interest

(This is based on a transfer that is fully repaid in equal instalments by the end of the 0% deal.)

Source: M&S Money

What are my options?

If those three reasons strike a chord with you, the alternative is to go for a lifetime balance transfer card. This type of card offers a low APR for as long as you have the card. What’s more, some of the best lifetime balance transfer cards don’t charge a fee for moving that balance over, which means that even though they charge interest, they work out cheaper in the long run than 0% cards.

Here are some of the best lifetime balance transfer cards on the market today.

Who should go for this type of card?

The answer depends on how much debt you have. Let’s look at a number of different debt sizes, and see which type of card works out the most appropriate.

My existing credit card debt is around £1,000

With a debt of £1,000, going for a market-leading 0% card like the Barclaycard Platinum will leave you with a transfer fee of £29 added to your original debt. And over 16 months, that works out at a monthly payment of a touch over £64 a month.

Alternatively, with the Barclaycard Simplicity, you won’t have to pay a fee to move that debt over. However, should you go with the same monthly payment as the Platinum card, by the end of the 16 months you’ll still have around £19 left to pay off.

So those of you with £1,000 of debt who can afford to spread your payments over 16 months (and no longer) should go for a 0% card, not a lifetime balance transfer card.

My existing credit card debt is around £2,500

Ok, now we are into the area of credit card debt that would leave me with a sleepless night or two.

With a debt of this size, the transfer fee on a 0% card comes to £72.50 – so it’s starting to get significant. If you wanted to pay that debt off in full over the interest-free period of the Barclaycard Platinum, you’ll be looking at payments of about £161 each month, which may be somewhat budget busting.

However, at least you would be debt-free by this point – with a lifetime card like the Barclaycard Simplicity, even after monthly payments of £161, you’d still have £44 left to pay off after 16 months.

So again, those of you with £2,500 of debt who can afford to spread your payments over 16 months (and no longer) should go for a 0% card, not a lifetime balance transfer card. If you can't afford the £161 a month this would entail, want to spread your repayments over a longer period and don't want to rate tart your balance to a new 0% card, then consider the lifetime balance transfer card instead.

My existing credit card debt is around £5,000

Sadly these days, £5,000 worth of debt is not that unusual. And the fee to transfer that money is pretty substantial, at £145, leaving a total debt of £5,145.

If you want to clear that money interest-free, that comes to a monthly payment of £321, a figure that can at best be described as unrealistic. Let’s assume that the maximum sum our borrower (let's call him Dave the debtor) can fork out on this debt each month is £161, as with the previous example.

By the end of the 16 months, Dave be hardly halfway through that debt, with an outstanding balance of £2,569. He’ll then either have to deal with the interest rate jumping to the best part of 20% - not a fun option on such a large balance – or scrabble around for a new 0% card, where he will again face a fee of more than £70.

What about with a lifetime balance transfer card? After 16 months, he’ll still have more debt left to pay off than if he’d gone for a 0% card, with £2,773 still on the card. However, he won’t have to worry about trawling around for a new home for his debt. Most importantly, he won't have to remember he needs to trawl around - because he won't be penalised by a jump in interest rates if he forgets. In this case, it's all about how much hassle you want and how much you feel you can rely on yourself to switch at exactly the right time.

Perhaps the £200-odd you'll save by switching will help to motivate you?

My existing credit card debt is around £7,500

Finally, let’s consider this serious sum of debt.

Transferring £7,500 of debt to a 0% card would entail a payment of £217.50 taking your total debt to an eye-watering £7,715.50. By the end of the 16 months, you’d still be looking at £5,139.50. You’d have made a decent dent into the debt, but again you’ll face huge interest increases, or else the hassle of finding a new card which will incur a further charge of about £150.

You'll most likely then need a third and fourth card in order to completely clear the debt.

With the lifetime balance transfer card, the debt left will stand at around £5,022. That’s more than £100 less than the interest-free option. What’s more, you won’t need to worry about shopping around for a new 0% interest card, or the associated fees. You can just carry on as you are.

So, to conclude, the bigger the debt, the more likely you are to be better off with a lifetime balance transfer card over a 0% card. Do the maths and see for yourself!

*This fantastic minimum monthly repayment credit card calculator from lovemoney.com reader dd may be useful if you want to calculate the difference for yourself.

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