Great news for credit card borrowers

Warnings of the demise of balance transfers were somewhat premature - 0% periods are growing again!

Last month I wrote a piece warning that things might be about to take a turn for the worse regarding balance transfer cards. The biggest sales point of any balance transfer card is just how long they give you 0% interest on those transfers. And the worrying sign was that those periods were being cut.

First off Virgin, for so long the market leader, cut down from 16 months to 14 months, in an attempt to quit being top of the table.

It was soon followed by a number of providers offering 15 months interest free, who cut their 0% periods. Nobody wanted to be market-leader.

The only way was down...

New market-leading cards!

Or so it seemed.

In the last month, however, the situation has changed.

Barclaycard Platinum has ramped up the period of 0% interest you can enjoy on its Platinum credit card from 13 months to 15 months, with a 3% fee.

The Royal Bank of Scotland and NatWest, which used to only allow existing current account customers to apply for their Platinum 0% cards, then decided to allow everyone to apply.

This is great news because the NatWest Platinum and the RBS Platinum cards both offer 0% for 15 months, but with a slightly lower fee than Barclays at just 2.9%.

Finally, Yorkshire Bank and Clydesdale Bank (both part of the same group) launched their own 16 month 0% interest balance transfer cards, with a 3% fee for transfers. However, these cards proved are not available online unless you're an existing customer, so if you want to apply online the next best cards are the NatWest Platinum and the RBS Platinum cards, as the table below shows:

The top 10 balance transfer cards

Compare credit cards at lovemoney.com

Wave goodbye to negative order of payment

What’s more, the way we use these cards will soon be very different indeed.

If you’ve been reading lovemoney.com for a while, you’ll know that one of our biggest bugbears is negative order of payment.

This is the frankly appalling trick that virtually all credit card providers employ in order to wring every last penny out of you.

Basically, when you make a payment towards your credit card bill, the money you hand over is allocated to your cheapest debt first, rather than your most expensive.

So, say you have a card which still has a year to run on its 0% balance transfer period, but charges 16.9% on any purchases you make. You transferred over £5,000 of debt when you took out the card, and today you decide to splash out £1,000 on a new TV (there is a World Cup on, after all!).

If you then make a payment of £1,000 towards your credit card, to cover the cost of the TV, you'll fall into the negative order of payment trap. Rather than paying off the TV, that money will reduce your cheapest debt – the £5,000 balance transfer, which is interest-free. Meanwhile, that £1,000 you spent on your new TV will start racking up interest until all of the balance transfer is cleared, costing you a small fortune!

However, that’s all changing.

Roll on January

From January 2011, new rules regarding credit cards will come into play reversing the sneakiness of negative order of payment.

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From that point the money you pay towards your bill each month will go first towards your most expensive debt, a move that experts reckon will save consumers between £300m and £500m!

Not only is this overdue, but it will potentially alter the way we use our credit cards.

For example, I have a couple of credit cards, for a couple of different purposes. I have a balance transfer card, which has got some old debt on it, but I have a separate card for purchases, precisely because I want to avoid negative order of payment.

Come January, the prospect of spending on that balance transfer card is not nearly as offputting as it is right now.  From that point on, if you make purchases on your balance transfer card, you can rest assured your debts will be paid off in the order that's cheapest for you.

This means balance transfer cards with 0% periods that last longer than seven months are particularly attractive right now, because come January, these cards will have to apply these new rules which mean the card is less profitable from the providers - and more beneficial for you!

Streamlining our plastic

For some, this may lead to a complete streamlining in our use of credit cards. Why have three different cards, if you only need one after all?

While this will undoubtedly be the result for some borrowers, personally I’ll still be keeping my cards separate, as you get more for your money this way.

For example, as a Tesco obsessive, I put all of my spending on my Tesco Clubcard credit card in order to rack up Clubcard points. Those who do all of their shopping in Sainsbury’s will likely do the same with the Sainsbury’s credit card, while other reward cards offer vouchers and cashback in exchange for your spending.

Unless the next few months see some serious innovation in the credit card provider market, with cards that offer both sizeable interest-free periods on balance transfers but also real rewards on your purchases, I think it will continue to pay to keep your spending and balance transfers separate.

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