Paying For Debts: Past And Future

by Neil Faulkner on 13 January 2009  |  29 comments
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Read about the cheapest way, for most people, to pay off old debts and to borrow yet more...Or you could just start living within your means!

Those of you familiar with credit cards know the drill. You swap your debt from one card to another, therefore paying as little as possible. You do this using a credit card offering 0% on balance-transfer deals. This way, if you pay off enough each month, you'll clear your debt faster and more cheaply. It's been the cheapest way for most people to clear a debt for many years now.

It's best if you have debts to reduce them every month, and we strongly suggest that you should get into the budgeting habit, to that end. Please!

However, we know that some people can't help borrowing still more. If this is you, and we can't persuade you to start living within your means just yet, at least take a look at your cheapest options before you simply spend more on your existing credit card or expand your overdraft further. It is possible that you can borrow more for free, and make your existing debts cheaper at the same time.

The cheapest way to pay for existing debts and to borrow some more

Most people will find that the cheapest way to pay back some of their debt in the near future, and to borrow more at the same time, is to get a single credit card with two deals: a 0% on balance-transfer deal and a 0% on new purchases deal.

Many cards offer deals on both, but it is very important that you look for cards that have deals of equal lengths. The reason is that, once one of the deals runs out (usually the 0% on purchases deal), you'll start paying interest on the debt you have run up. And you won't be able to even start reducing the interest you pay until you've paid off everything you borrowed with the other deal. This is called Negative Payment Hierarchy. (It's a bit complicated, but you can read more about this dodgy trick in Beware Of This Dirty Card Trick!)

With the balance-transfer deals, you pay no interest for the length of the deal, but you do pay a transfer fee, typically 2.5% to 3%, up front. This is usually added to your debt. With the new purchases deals, you pay no interest or fees whatsoever for the length of the deal.

It's important that you always pay the minimum payment, even if you're not charged interest. Please try to pay more or you'll never clear your debt. Missing a payment will usually mean the deal is cancelled, and you go straight on to the horrific, standard interest (APR) rates .

Here are the top cards that are suitable for both balance transfers and purchases currently available on the market:

The top five credit cards for both transfers and new purchases

I've included the card issuer. This is because if you already have a card from the same issuer then you won't be able to get another one. You should always close card accounts as soon as you stop using them.

Never use your credit cards for other things, such as cash advances or cash withdrawals, and don't spend using any credit-card cheques you get either. These things are even worse than horrifically expensive, and you will get caught out by the nasty small print.

Two more good cards

There are two other cards that didn't make my table that deserve a mention. The Saga Platinum Visa has a 6 month deal on both purchases and balance transfers, with a fee of just 2%. Therefore, it should be in fourth place on my table, but I excluded it because it's available to the over-50s only.

The Nationwide Gold card is always worth a mention when you're considering purchases and balance transfers, because it's one of just two cards that are currently available to new customers which doesn't apply Negative Payment Hierarchy. (The other is the Saga card I just mentioned!)

On the downside, Nationwide's purchases deal is for just three months. However its balance-transfer deal lasts 13 months with a 3% fee.

Alternatives to these credit cards

If you think you won't be able to pay off all your debt before the deal expires and if you expect your credit situation to deteriorate in the next half year or so, you should consider getting a cheap, unsecured personal loan or a lifetime balance-transfer card instead. This is because you don't want to be stuck with a big debt on one of these cards when they start charging you their huge, standard interest rates (typically around 16% APR).

After transferring debts, please cut up your old cards, close the accounts, and don't use them again!

If you've decided to start living within your means, you won't need a 0% on new purchases deal. If you concentrate on balance transfers only, you can get deals lasting up to 16 months. Compare balance-transfer cards through The Fool.