Jane Baker explains how to get a good credit card deal if you want to transfer your balance and pay less interest on your new purchases.
I recently moved to London and started my job here at The Fool so, with everything changing, it seemed like the ideal opportunity to rethink my finances. And since I write about this very subject every day, I really should practice what I preach!
I'd accumulated one or two largish moving expenses which I paid for with my trusty old credit card. I'd used this same card for as long as I can remember but the APR had gradually climbed up over the last few years to a hefty 16%. Although this is fairly typical for a card from a high street bank, it's pretty uncompetitive compared to others available in the market.
Paying that much interest on my old balance as well as the furniture I needed to buy for my new pad seemed a painful prospect, especially as I knew I wouldn't be able to pay the balance off straightaway.
Of course, I wanted to keep cost of my debt as low as possible, so I decided to apply for a new credit card which offers an interest-free period on my existing balance, plus any new spending. I used the The Motley Fool Credit Card search to find a card which combines both benefits over the longest period possible.
I found a card which tempted me with an interest-free period for 12 months on both balance transfers and new purchases. It's important the interest-free period lasts for the same length of time on all sources of borrowing - covering both your old debt and your new purchases - because this allows you to avoid negative payment hierarchy.
Why is this so important? If you choose a card which offers 0% for 12 months on balance transfers but say, only three months for new purchases, once the three-month period is up, your monthly repayments will be used to clear the least expensive debt first. That is your 0% balance transfer which still has nine months left to run. This will be repaid ahead of your more costly debt -- your purchases -- which will then be charged at the much higher standard APR.
In other words, with negative payment hierarchy, your cheapest debts are repaid first, leaving the more expensive borrowings on your card for longer while running up a lot of extra interest.
With my new card I won't be paying over the odds in interest on my new furniture but there is a catch to look out for. In my case I had to pay a 3% fee on my transferred balance but I think that's reasonable given the amount of interest I reckon I'll save overall.
The only drawback is that when the year is up, if I haven't cleared the balance on my card (although I'll try my best to!) I'll probably need to transfer my debt once again to take advantage of a new 0% deal. And as for new purchases, although my new card offers a great initial interest-free period, the standard APR which will kick in later on is pretty high so I'll have to try and avoid that too.
But I'm not worried. If I haven't paid off all my credit card debt, I know I can always visit The Fool's credit card centre to compare credit cards with 0% balance transfers, and hopefully find another interest-free credit card to use next year.