Shifting your existing credit card debt to a 0% balance transfer deal is a convenient way to minimise the cost of borrowing, but there are a number of pitfalls that could take the shine off an offer.
Welcome to the balance transfer battleground, where providers are fighting to boost business by continually reducing fees and extending the length of interest-free periods.
Such a competitive market is good news if you want to cut the interest you pay on credit card debt and you’ll be spoilt for choice when it comes to picking a deal. But what do you need to watch out for?
0% balance transfers: deal duration
It might be tempting to opt for the card with the longest 0% balance transfer period available, but bear in mind that there’s no guarantee you’ll get this.
The terms and conditions for Barclaycard’s market-leading 30-month deal, for example, state that it offers ‘0% interest for 30 or 15 months from account opening (depending on individual circumstances)’, so you could end up with a 0% period lasting for just half of what you applied for.
Regardless of how long the interest-free period lasts, most providers reserve the right to withdraw a deal at any time if you miss a payment or exceed your credit limit, meaning you’ll be charged interest at their standard rate.
Action point: Set up a Direct Debit payment for the minimum amount on the card. This will prevent you losing a 0% balance transfer deal and being charged at your standard rate as a result of a missed payment.
0% balance transfers: how much do they cost?
While 0% balance transfer deals give you a break from paying interest on credit card debt, they’re not entirely free from charges. Balance transfer fees are typically about 3%, but some cards charge up to 5%.
Generally speaking, the longer the deal, the higher the fee. For example, Barclaycard’s 30-month 0% deal comes with a fee of 2.9%, while Tesco Bank’s 12-month deal charges just 0.85%.
Action point: Consider how long it’ll take you to pay off your balance and look for a deal that charges the lowest fee for the appropriate 0% period.
0% balance transfers: avoid purchases
Normally, if you spend on your credit card and pay off the balance in full every month, you’ll receive up to 56 days interest-free on new purchases.
But if you’ve just transferred a balance, it’s highly unlikely you’ll have cleared the previous month’s bill. This means you’ll always be charged interest on purchases, even if you pay them off when your bill arrives.
Action point: Consider using two separate cards – one that offers 0% on purchases and one with 0% on balance transfers. Some cards offer 0% periods on both purchases and balance transfers, but these tend to be shorter than separate deals.
0% balance transfers: time is money
Most balance transfer deals begin from the date of issue rather than the date of transfer, so you’ll usually need to move your existing balance across as soon as you’ve applied in order to benefit from the full length of the deal.
It may sound obvious, but it’s also important that you clear your debt before the end of the 0% deal to avoid reverting to the standard APR – typically around 18.9%.
Action point: Draw up a repayment schedule and do your best to stick to it. If you don’t manage to pay off your debt before the 0% period ends, transfer the remainder of the balance to a new deal to minimise the interest you pay.