A credit card balance transfer fee can be a real sting in the tail. Here's how to avoid it.
A 0% balance transfer credit card is a wonderful thing. True, in a perfect world we wouldn't have debts to deal with at all, but -- in classic Foolish-style -- balance transfers give you the opportunity to get to grips with your credit card debt, without paying a single penny in interest for the entire 0% introductory period.
But these cards usually come with a catch: a balance transfer fee. In return for enjoying an interest-free period, most cards will charge you a fee of 2% to 3% of your balance. That means, if you transfer a balance of £3,000, a 3% upfront fee will cost you £90.
This fee is added to your total credit card debt. If you haven't repaid your outstanding balance by the time the 0% period is up, interest on the fee may become payable.
So, wouldn't it be great if you could transfer your balance without being charged a fee?
Fee-free balance transfer cards were once pretty easy to come by, but these days they are very few and far between. I've hunted them down for you and found just three on the market: the new Abbey Zero Credit Card, the Ulster Bank Mastercard & Visa Card and Gold Card.
Here's a quick summary of what these cards have to offer:
Fee-Free Balance Transfer Credit Cards
Card | Balance Transfer Rate & Period | Balance Transfer Fee | New Purchases Rate & Period | Typical APR | Conditions |
|---|---|---|---|---|---|
Abbey Zero Credit Card | 0% for 6 months | Free! | 0% for 6 months | 18.9% | None |
Ulster Bank Mastercard & Visa | 0% for 6 months | Free! | 0% for 6 months | 19.9% | None |
Ulster Bank Gold Card | 0% for 6 months | Free! | 0% for 6 months | 16.9% | Must earn at least £20,000 |
I should also mention here that not only does Abbey offer fee-free balance transfers; it's a really useful card to have abroad as well. There are no fees for spending while you're on holiday or if you unexpectedly need to withdraw cash from an ATM.
But don't forget, you should be careful how you use your card. Cash withdrawals are normally charged at astronomical rates of interest. With Abbey Zero, cash advances are charged at 25.9%, so you should only resort to using your card for this purpose in an absolute emergency.
As you can see from the table, these fee-free credit cards all offer 0% introductory periods which lasts for six months. What's more, that applies to both your balance transfer and further spending, which means you don't have to worry about `negative payment hierarchy'.
Cards that clear your debts using negative payment hierarchy can be more expensive because the debts which are charged at the highest interest rates are repaid last. That means you'll end up paying more interest overall.
Let's say you have a credit card with a 0% balance transfer but your spending is charged at say, 16%. Your monthly repayments would be used to clear the balance transfer first, leaving your purchases on the card for longer, costing you more in interest.
Luckily, where the 0% deal lasts for the same period on the transfer and new purchases, you won't fall into the negative payment hierarchy trap.
Fee-free cards sound good so far, but the credit card with the longest 0% deal on transfers is far more generous at 15 months, rather than six. That makes these fee-free beauties seem uncompetitive by comparison, so why am I recommending them?
Two reasons: Firstly, if you were planning on clearing your credit card debt within the next six months anyway, why not side-step the fee?
Secondly, if you have a large balance to transfer, a fee of, say, 3% would rack your debt up even further. If you wanted to transfer £20,000, the fee would add an extra £600 to your existing debt.
Of course, if you haven't managed to clear your debts within six months, there's always the option to move your remaining balance to a new 0% card. But remember, in these turbulent credit crunching times, we don't know what the availability of 0% credit cards and lending criteria will be like in six month's time. You should bear that in mind if you're considering a shorter-term, fee-free 0% card.
If you would rather not deal with the hassle of moving your balance again after six months, I suggest you go for a longer 0% deal. But be warned: there will be no escaping the balance transfer fee. That said the Virgin Credit Card is offering an interest-free period for a full 15 months, while the Egg Credit Card won't charge you a penny in interest on your transfer until August 2009.
More: Use This Credit Card To Beat The Crunch | Cash And Credit Cards Don't Mix |Visit the Motley Fool Credit Card Centre to find the right card for you