You can save a fortune by transferring your credit-card balances to a 0% deal. Just make you avoid these six mistakes.
Thanks to the worldwide credit crunch, financial markets have suffered a nasty kick in the teeth. As mega-losses on dodgy US home loans continue to soar, banks have become much warier when it comes to lending, particularly on credit cards and mortgages. This is making life hard for both businesses and consumers, as credit lines are withdrawn and interest rates are jacked up.
However, there's one area of lending which is still going great guns: the 0% balance transfer market. Using the Fool's search wizard, I searched the entire credit-card market to find out how many 0% transfer deals are on offer. Believe it or not, there are 97 different 0% credit cards begging to welcome your existing debts today.
In case you haven't come across balance transfers before, they are the perfect way to slash the interest bill on your existing credit- and store-card balances. You simply open a new 0% interest card and ask this card issuer to pay off your existing interest-bearing debts. You then make monthly repayments to reduce your new 0% balance, while avoiding interest charges for up to fifteen months. Eureka!
What's more, there are big savings to be made from exploiting these interest-free deals. Indeed, a typical credit card charges a yearly interest rate of over 16.5% APR on purchases, which is three times the Bank of England's base rate of 5.5% a year. For cash withdrawals, you can expect to pay around 25% APR, plus additional withdrawal fees. Ouch!
However, before you rush off to find a Best Buy 0% balance transfer, you need to do your homework. Otherwise, you could fall into one of these traps:
1. Lenders won't offer 0% on their own lending
It's important to note that a lender won't allow balance transfers between its own cards. So, if you have a debt on, say, a NatWest credit card, then you won't be able to transfer this balance to any card issued by NatWest's parent company, Royal Bank of Scotland Group. Thus, in this example, out go 0% offers by NatWest's sister companies MINT, RBS, Tesco Personal Finance and Ulster Bank (NI).
For more information on which brands belong to which card issuers, read When Balance Transfers Go Bad.
2. Check to see how long each 0% offer lasts
It goes without saying that the longer a 0% deal lasts, the better. The very best run for fifteen months; the shortest deal I've found lasts a mere three months. There does seem to be some clustering around the one-year mark, with scores of cards offering interest-free credit for twelve months. Thus, if you don't want to be switching cards two or three times a year, then opt for a 0% deal which lasts at least a year.
3. You need to maintain a perfect payment history
All balance transfer deals are `loss leaders'. In other words, lenders actually lose money by lending to you at 0% while they borrow at, say, 5.5% a year. Thus, they clamp down hard on cardholders who pay late or miss their minimum monthly repayments. So make sure you can meet your monthly payments or you could find your 0% deal is suddenly withdrawn. This would be a disaster, so be sure to set up a monthly direct debit or standing order for your minimum monthly repayment.
4. You need to take transfer fees into account
In the glory days of 0% balance transfers, from Christmas Day 2000 until August 2005, balance transfers were fee-free as well as interest-free. Thus, it cost you nothing to move between 0% deals. Alas, lenders got wise to `rate tarts' surfing their debts across a string of 0% deals. In order to stem their losses, card issuers introduced upfront transfer fees.
These days, for a 0% transfer lasting between six and fifteen months, you can expect to pay a balance-transfer fee of 2% to 3% of the value of each transfer. So, for three separate transfers of £2,000, you can expect to pay total fees of between £120 and £180. For the record, the only cards I found with no transfer fees were Northern Irish banks Ulster Bank (six months) and Northern Bank (five months).
Furthermore, it's important to understand that a 3% upfront fee is costlier than spreading 3% interest over the course of a year. As I warned in Beware Of These 0% Card Tricks, a 3% fee for a one-year 0% deal comes to a yearly interest rate of 5.7% AER (Annual Equivalent Rate). For a six-month deal, a 3% fee is the equivalent of 10.7% AER. Thus, be sure to take these fees into account when working out the potential savings to be made.
5. Watch out for retail interest rates on transfer fees
Some crafty card issuers -- Egg and MBNA among them -- classify transfer fees as retail transactions. This enables them to charge standard interest rates on 0% fees. Personally, I think this is extremely unfair, and it leaves them open to charges of false advertising. After all, if you have to pay a transfer fee and must pay interest on this, then you are not paying `0% interest' at all, are you? I think that the Office of Fair Trading needs to look into this sneaky scam...
6. Don't be tempted to spend on a balance-transfer card
Although a few credit cards offer 0% interest on both balance transfers and retail spending, these are the exception rather than the rule. So, my advice is simple: if you're not absolutely certain that you'll pay no interest on purchases as well as transfers throughout the life of your 0% deal, then never take a 0% transfer card shopping. Otherwise, you'll pay interest at standard rates on your spending, which defeats the point of playing the 0% game.
One final bonus tip: do watch out for balance-transfer offers from your existing credit card issuers. Some of these deals can be very attractive, but others should go straight in the bin. For example, MBNA has offered me 0% for nine months with a 3% transfer fee, but Morgan Stanley has offered me 6.9% APR for six months with a 3% fee. Can you guess which special offer I prefer?
More: Apply for a cracking credit card via the Fool | Why Can't I Get A Credit Card? | Free Yourself From Credit Card Debt