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Fees rising on 0% balance transfer credit cards

Emma Lunn
by Lovemoney Staff Emma Lunn on 22 January 2012  |  Comments 2 comments

Balance transfer cards now offer the longest debt free deals on record, but consumers need to watch out for hiked up fees.

Fees rising on 0% balance transfer credit cards

When it comes to reducing the interest you pay on your debts, you can’t beat a credit card with a zero-interest opening offer on balance transfers. These cards give you the opportunity to really tackle your debts as 100% of the repayments you make go towards paying off the capital owed rather than being wasted on the interest.

Balance transfer deals have long been a battleground for credit card providers with companies offering longer and longer interest-free periods. You can now get a massive two years interest-free with Barclaycard’s Platinum card.

But, the sting in the tail with these cards is the balance transfer fee.

Rising fees

If consumers continually shift their debt from interest-free card to interest-free card, credit card companies won’t make any money from offering these deals. So to make sure they’re quids in they charge a fee when you transfer an existing debt to a new card.

The fee is usually a percentage of the balance you want to transfer. When balance transfer fees were introduced they tended to be quite low, but the past few years has seen them creep up and up.

According to Moneyfacts, the average balance transfer fee is now at its highest level in four years at 2.93% compared to 2.88% a year ago, 2.65% two years ago and 2.63% four years ago.

That means if you transferred a balance of £1,000 you’d have to pay an average fee of £29.30.

The card with the highest balance transfer fee at the moment is the Halifax MasterCard which has a 3.5% fee. So you’d be paying £35 for every £1,000 of debt you transferred to the card.

Longer deals

However, despite fees rising there are plenty of extremely attractive balance transfer cards to choose from at the moment.

Barclaycard Platinum offers 24 months interest-free with HSBC not far behind at 23 months (exclusive to HSBC current account customers) and Halifax at 22 months.

However, the same cards only offer 0% interest on purchases for three months, so it’s important not to put new spending on the card after this time as this will be charged at the standard APR of 17.9%.

Do the sums

When working out whether it’s worth switching an existing debt to a new credit card it’s important to take the size of the balance transfer fee into account.

In most cases it will be well worthwhile the switch. For example, if someone had a £5,000 balance on a card with an APR of 17% and paid £100 a month they’d pay £759.15 in interest over a year. If they switched the debt to Barclaycard Platinum they’d pay £160 in fees but no interest in a year. This would save them almost £600 over the course of a year so the switch is clearly worthwhile.

When looking for a balance transfer deal the next thing you need to do is compare balance transfer fees offered by different providers offering balance transfer deals of similar lengths.

For example, switching a £5,000 debt to Halifax’s card with a fee of 3.5% would cost you £175. But switching the same debt to Virgin Money’s All Round credit card, which offers 0% interest on balance transfers for 16 months (and six months on purchases) with a 1.99% fee, would cost you £99.50, saving you £75.50.

Minimum repayments

All credit cards come with a minimum repayment you need to make each month, normally around 1% to 3% of the outstanding balance with a minimum of £5.

However, it’s important to pay more than the minimum repayment each month, otherwise there’s a danger that you will never repay the debt if it’s accumulating interest.

The average purchase rate for a credit card is 18.3%. Working on the common minimum repayment of 1% or £5 a month, a balance of £350 would take more than 21 years to repay, costing a total of £946 in interest. However, if that balance was £1,000 the interest would build up so much that the balance would never get repaid.

If you just paid the minimum repayment on a zero-interest balance transfer card you’d reach the end of the interest-free period before repaying the debt. A £350 debt, for example, would take 70 months (nearly six years) to pay off at £5 a month. The 0% periods may have got longer of late, but no balance transfer deal lasts that long!

Bear in mind that if you don’t make at least the minimum payment by the payment due date, or you exceed your credit limit, most credit card providers will remove the 0% rate on your balance transfer and charge you interest at your standard rate instead.

More: Nationwide launches market-leading 0% credit card | You can’t beat Barclaycard’s 24-month 0% card

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Comments (2)

  • ains
    Love rating 4
    ains said

    I am using the cash advance facility on my virgin Amex card to effectively reduce the balance to 0% for a year for a fee of 2%. This works out to less than 2 months interest payments and the positive hierarchy means with any new purchases paid of each month means You can maintain near to zero charges all year. I can recommend this if you are disiplined enough to reduce your balance significantly. We have also accumulated enough Airmiles for a 2 return tickets to the US in a year by channelling regular spending through the account, and these renew for 3 years each time you spend so my car refuelling maintains them. They also issue with a Visa card on the same account for when Amex is not accepted. Biggest benefit is not having to change cards as the offer comes up regularly. if you have no outstanding debt put a decent sum into a high return ISA and you could profit from borrowing!

    Report on 22 January 2012  |  Love thisLove  0 loves
  • gr8it
    Love rating 7
    gr8it said

    I think you've not been introduced to the MBNA 5% Balance Transfer fee, Halifax falls short by some way compared to MBNA. They've been charging that for at least 2 years, maybe more.

    What really annoys me is that these companies can still use the headline 0% rate to market these credit facilities.

    When are the authorities going to crack down on this so that they have to show the true APR of the deal?

    For example, MBNA offering 1000 over 6 months on 0% with a 5% upfront transfer fee, means that you pay 10% APR plus you could add combined interest to the original fee over the period of the loan pushing the true APR even higher.

    People may not be doing the maths properly when they see 0%, but by regulating the industry and changing it for the better in recent years for the consumer, the credit companies have found another way to screw the customer and get away with it.

    Force them to publish the true cost in terms of APR and finally the playing field will be levelled and the customer will be properly informed.

    Report on 22 January 2012  |  Love thisLove  0 loves

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