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.
[SPOTLIGHT]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.
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