Here's a simple way to borrow money cheaply for prolonged periods which also comes with a no-cost get-out.
What are your choices if you're cheesed off with paying high rates of interest on your credit card debts? The most obvious option is to use your spare cash or savings to pay off your debts. This is usually a good move, since the best savings rates barely exceed 6% a year before tax, whereas a typical credit card charges annual interest of around 17%.
However, if you don't have sufficient savings to clear your card balances, then you need to look for alternatives. For example, by taking advantage of a 0% balance transfer deal, you can slash your interest bill to zero for an extended period. Take, for instance, the popular Virgin credit card, which offers 0% on balance transfers for fifteen months on payment of a transfer fee of 2.98%.
Then again, the problem with 0% transfer deals is that they only last for between five and fifteen months. Thus, in order to use them as a long-term source of cheap credit, you need to become a `rate tart'. In other words, you need to shift your debt from one 0% deal to another, perhaps as often as once or twice a year.
Alas, frequently applying for credit leaves a series of `footprints' on your credit record. If lenders see too many footprints, then this can make them nervous and, therefore, less likely to grant you credit. Even worse, thanks to a worldwide credit crunch, banks have become nervous about lending to individuals, companies and each other. Thus, getting credit today is perhaps as hard as it's been in a decade or more.
Nevertheless, there is a way to borrow money over the long term without having to switch deals again and again. Instead of transferring your plastic balances to a 0% card, simply move them to a lifetime balance transfer deal. In most cases, a lifetime balance transfer does what it says on the tin -- you enjoy a low rate of interest on transferred balances until they are repaid in full. On the other hand, some so-called `lifetime' balance transfers actually last for, say, three to five years.
Still, lifetime balance transfers do offer great value, as some charge interest rates lower than the Bank of England's base rate, which is presently 5.75% a year. Take a look at the table below:
Card | Transfer Rate | Transfer Fee | Typical APR (%) |
|---|---|---|---|
5.8% for life | None | 16.9 | |
5.9% for life | None | 14.9 | |
4.9% to 31/01/12 | 2.5% | 15.9 | |
4.9% to 01/12/10 | 3% | 12.9 |
As you can see, the first two cards offer `genuine' lifetime transfers at rates merely a fraction above base rate -- and with no transfer fee. However, HSBC's 4.9% transfer rate lasts just over four years, and Goldfish's deal lasts under three years. What's more, both these cards charge transfer fees, making them more expensive over the short term than the authentic lifetime transfers.
By being crafty, you can even use these transfer deals to hedge against future interest-rate changes. For example, if interest rates were to plummet, then you could transfer from your current lifetime deal into a more attractive replacement. On the other hand, if the cost of borrowing rises, then you simply leave your debts on these low-rate deals until you have cleared them.
Finally, a warning: never, ever use balance transfer cards for any other purpose. In other words, don't use them to go shopping, buy stuff on the Internet, or withdraw cash. If you do, then you'll start paying interest at the standard interest rates shown in column four above. Alas, this defeats the point of transferring balances in the first place!
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