Four steps to the perfect credit card balance transfer

by Szu Ping Chan on 30 June 2009  |  4 comments
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Balance transfers can be tricky affairs. Here are some top tips to ensure all goes smoothly...

Over the years, 0% balance transfer credit cards have become a godsend to borrowers and savers alike.

Not only do they give you a breather from your debts, but they can save you thousands of pounds in interest payments, and in the past, could also be used to make a tidy sum of cash through a process called stoozing.

The introduction of balance transfer fees, coupled with low interest rates means stoozing is now a thing of the past. But if you play your cards right, balance transfers are still one of the best financial lifelines for those sticky credit card situations.

Here are four steps to ensure your transfer goes smoothly...

Step 1: Apply for the longest possible deal

The first decision you need to make when transferring a balance is to choose the perfect card for you. This generally means looking for the longest balance transfer deal available.

On a £5,000 debt, the difference between the longest 0% balance transfer deal (the Virgin Money MasterCard which lasts 16 months), and the shortest (The GM credit card which lasts five months), can cost a startling £868.27 in interest payments over the time taken to pay off!*

So it pays to apply for the longest possible deal.

Also bear in mind that you can't transfer a balance between cards issued by the same provider. So you won't be able to shift your debts from an existing MBNA card to a Virgin card, or from Mint to a NatWest or RBS credit card.

A deck of different credit cards gives you the lowdown on which cards are issued by which providers, so you won't make the mistake of taking out a credit card you can't transfer your balance to.

Step 2: Avoid paying the largest fee

Although fees are now a regular feature of balance transfers, there are still ways you can avoid paying more than you should.

For example, one nifty feature of all MBNA credit cards is they allow you to transfer part of your credit limit as cash to pay off a loan or overdraft.

However, when it comes to the market leading Virgin credit card, it charges a higher transfer fee of 4% for the privilege (instead of the standard 2.98% fee) of transferring money into your account.

But if you use one of the credit card cheques in your welcome pack to pay the money into your bank account instead of the money transfer service, you'll be charged the lower fee of 2.98%, which will save you over £50 on a £5,000 transfer.

Step 3: Save your payments

If you plan to pay off the bulk of your credit card debt before the end of the promotional transfer period, instead of drip feeding your payments into your credit card, why not put this money in a regular savings account, so you will earn some interest while your debt is interest-free?

For example, if you put £100 a month into the market leading Barclays monthly savings account for a year instead of towards your credit card debt, you'd earn £30.98 in interest as a basic rate taxpayer over 12 months.

Ok, that doesn't sound much, but it's better than nothing. And it will also help to offset those nasty balance transfer fees.

Step 4: Avoid the negative payment hierarchy trap!

If you're not careful, negative payment hierarchy can put a nasty sting in the tail of what should be a smooth balance transfer.

Cards which operate negative payment hierarchy allocate any payments you make to your cheapest debts (such as promotional balance transfers) first, leaving the most expensive debts (like cash advances) until last.

It's easy to be trapped by negative payment hierarchy if you take out a card with uneven promotional periods, such as one that offers 0% for 12 months on balance transfers, but only 0% for three months on purchases.

Once the promotional purchase period ends, any purchases you've made will start to accrue interest at the lender's standard rate (typically around 17%), while any payments you make will go towards your 0% balance transfer - leaving your purchases to rack up loads of interest, while you are forced to pay off your interest-free debt.

Only two card issuers, Nationwide and Saga, operate positive payment hierarchy (where the most expensive debts are paid off first). So if you are going to take transfer your debt, don't spend on the card as well, or you will end up paying lots of unnecessary interest. This applies even if there is a 0% on purchases period for the first few months. It's simple: once you get the card, cut it up. Don't use it.

Alternatively, choose a credit card which offers the same 0% period for purchases as it does for balance transfers, such as the Halifax All in One MasterCard.

With this card, both promotional periods are equal, so you won't run the risk of falling foul of negative payment hierarchy.  Save your summer with this credit card explains more.

*Based on monthly payments of £100 until the balance is cleared

Compare 0% balance transfer credit cards at lovemoney.com!

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