A couple of weeks ago, I found myself almost at the edge of my £1400 overdraft limit. Given that only £500 of it is interest-free, that wasn’t a good position to be in!
I also had a credit card - with around £750 on it - which was nearing the end of its 0% deal.
So - how did I get rid of these looming interest payments?
0% money transfer
As I explained in Cut Your Interest Payments Down To Zero, many credit cards allow you to transfer money from the card into your bank account.
Unfortunately, they usually charge very high rates of interest on this sort of cash advance, far higher than you would pay with most personal loans or overdrafts.
However - there are a few cards that allow you to transfer cash into your bank account and still take advantage of the card's 0% balance transfer benefits.
So, for as long as the 0% balance transfer deal lasts, you don’t pay any interest on the cash you borrowed on the credit card.
I think the Virgin Money MasterCard is one of the best cards for doing this, because the 0% balance transfer deal currently lasts for a whopping 15 months.
Virgin charge a 2.98% transfer fee on balance transfers from other credit cards, and on money transfers into bank accounts.
I applied for this card last week.
How it works
In a nutshell, I applied online and then answered a few follow-up questions on the phone. Fortunately for me, I was accepted.
I organised the transfer to my bank account on the phone rather than online (there didn’t seem to be a section of the form that dealt with this), and was told that everything would be sorted (credit card transfer and bank transfer) in 7-10 days. Bonza!
The benefits
Because of the balance transfer fees, shifting debt in this way isn’t free. However, 2.98% is a much lower rate than those charged by personal loans. Here’s what I paid:
Bank account transfer | Fee for bank account transfer | Card balance transfer | Fee for card balance transfer | Total amount borrowed | Total fees paid |
|---|
£1400 | £41.72 | £749 | £22.32 | £2149 | £64.04 |
So, on a 15 month loan, I’m paying back just 2.98% more than I borrowed on the card - far less than the interest I would have paid if I’d left my money where it was.
And on my budget, I should be able to comfortably clear the balance before the 0% deal comes to an end.
So what’s the catch?
Used cannily, this card could save you a lot of money. But credit card providers - Virgin included - are obviously out to make a profit. Watch out for the following snags!
• The Virgin card also offers a three-month, 0% deal on new purchases. While this seems like a nice extra (and they tempt you with juicy discounts if you spend), I wouldn’t purchase anything on the card unless I could clear the balance every month.
This is because Virgin operates negative payment hierarchy. Basically, this means you pay off the 0% debt first, whilst your purchase and cash withdrawals remain on the credit card racking up lots of extra interest. Not good!
• You’ll be offered (and encouraged to buy) both payment protection insurance and identity theft insurance.
Personally, I turned both these down. As Fool writer Cliff D’Arcy has highlighted time and again, the PPI sold with financial products is usually incredibly bad value.
And even worse - Virgin classes both PPI and identity theft insurance as ‘retail transactions’ - so interest would be charged on these after just three months!
• Don’t, whatever you do, be late with your payments. If you don’t pay the minimum amount back on time, every month, your interest-free deal will be whipped away from you.
You’ll end up paying a typical APR of 15.9% instead - and you may well be hit with other penalty charges as well. Not a nice thought.
To avoid this happening, set up a direct debit to make the minimum payment on your card every month - or more if you can afford it.
• Finally, as with all credit card applications, you won’t find out what your credit limit is until you’re accepted for the card. If your limit turns out not to be enough to clear your overdraft as well as your other credit cards, you may wish you hadn’t bothered.
Unfortunately there’s no way round this at the moment - but it’s something to be aware of.
To make the most of this sort of deal, you need to do your research thoroughly and avoid the the tricks that could cost you a fortune.
If you’re canny, the Virgin card could save you a lot of money in interest payments. Hopefully, in 15 months I’ll have cleared my debt and cut up my card. I’ll keep you posted!