Finance Tips

0% balance transfer credit cards are a type of interest free credit card which allow you to pay zero interest on your debt for a fixed period of time, meaning it can be a cheap way to pay off debts if you can navigate the system to your benefit. However, while these credit cards can be very useful in certain circumstances, if you’re not careful they could equally lose you money. Here are the dos and don’ts of 0% balance transfer cards.

DO: Compare offers

Different providers offer different terms on their 0% balance transfer credit cards. Shop around for longer interest free repayment periods, lower interest rates once the offer is over and lower transfer fees where possible. It might not seem important right now, since you will not be paying any interest at first, but these factors could save you hundreds of pounds later on if you find yourself unable to pay off the balance within the promotional interest free period.

DON’T: Ignore transfer fees

Transfer fees are now standard on the majority of 0% balance transfer cards. This is because providers want to avoid customers taking up the interest free offer, failing to pay off their debt within the promotional and simply switching card supplier each time the interest free offer expires. Balance transfer fees vary from card to card but are usually around 2.5% to 3% of the total balance owed. Look for the lowest balance transfer fees possible when comparing credit cards.

DO: Be realistic

Be completely honest with yourself about how long it will take you to pay off your debt. If you know you can realistically pay it off within the interest free period, it could well be a good idea. If you’re not sure then you need to be wary of 0% balance transfer credit cards – leaving your debt for longer than the interest free period could costs you high interest repayments, the average interest on credit cards being around 17.5% in the UK. If you run out of time and choose to move your debt, meanwhile, you may be met with the alternative cost of the card’s transfer fee. If you don’t really know how long it will take to pay off your debts, a lifetime balance credit card might be more appropriate.

DON’T: Make purchases

Unless your 0% balance transfer credit card terms specify that the card is 0% on purchases, the likelihood is that you will have to pay very high interest on any purchases you make with the card. Even if the card does specify ’0% on purchases’, many customers don’t fully understand the conditions attached to this. Certain purchases could still carry high interest rates, as could instant cash transactions, such as cash withdrawals, so people often inadvertently trigger these expenses simply due to not understanding the terms and conditions attached. Also, making any purchases will increase the overall debt and make it harder to pay off the balance before the end of the promotional interest free period.

These days there are numerous credit cards in the market with 0% balance transfers for up 12 months or more. This interest free borrowing period is an obvious incentive to encourage new customers to sign up.

The interest free balance transfer option has its merits as you get to enjoy an interest free credit period within which you can pay off the balance or take a credit card repayment holiday. As the saying goes “nothing in life is free”, there is a catch and most potential credit cardholders tend to over look this in the haste to sign up.

Balance shifting fees: fees of up to 3% may be charged by some companies which is mostly listed in the small print and not clearly advertised.

Ratchet APR%s: be mindful as companies may offer an increased interest free period at a later stage with an increased (higher than normal APR%) on purchase transactions and cash advances.

The biggest catch: apart from rates the real benefit of moving credit balances is the 0% balance transfer period on credit cards as it can help you pocket a decent amount of savings. But credit card companies also know that and the biggest catch is that you can only remain at the 0% APR rate on the old balance which you transferred, regardless of how much you have reduced that balance by.

To illustrate, say you transferred a balance of £3,000 from your old Halifax card to a new HSBC credit card which gives you a 6 months 0% APR on transfer. During the first two months you manage to repay £2,000 of that old transferred debt and to celebrate, you decide to go shopping and put on another £1,000 on the new card. Now, one would think that the deal was £3,000 with 0% APR for 6 months but no, the new purchase of £1,000 would be charged at the credit card’s normal APR% while the old balance remains at the 0% rate. The tip here is to never use your balance transfer card to make purchases as you will lose the main advantage of taking the 0% interest period in the first place. Always check the fine print before applying and try searching the web to get behind the deals.