Great balance transfer cards
More than 4.5 million people are planning to take advantage of introductory credit card rates by moving more than £3.2 billion between credit cards between now and March.
The number of people looking to transfer previous years’ debt onto a 0% balance transfer card has jumped by a third over the past 12 months, according to research from Santander.
"This is a clear sign that consumers are becoming savvier when it comes to managing their finances,” says Emma Roberts, director at Santander Cards. “It's encouraging that so many Britons are planning to take control of their finances in the New Year by transferring an outstanding credit card balance to a 0%."
Moving your outstanding credit balance onto a 0% card makes financial sense for many people - taking the average interest rate of 17.4%, a £5,000 balance will cost you £870 over a year.
However, there are some points to consider before you sign up for one of these introductory deals.
1. Check your credit record first
Balance transfer credit cards are popular, so providers tend to only offer these interest-free deals to borrowers with a good history of repaying their debts. Before you apply for a card, it’s worth checking your credit rating to make sure there are no problems on your record that could see your application rejected.
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2. Watch out for fees
Be aware that most balance transfer cards require you to pay a fee, which is normally around the 3% mark. Some providers also have a minimum fee amount.
The balance transfer fee will add to the cost of your debt. In some cases it might be worth looking for a credit card with low rate of interest and no balance transfer fee – although you will be charged interest, it could be worth it in the long run especially if you think you’ll need a while to pay off the balance.
3. Negative payment hierarchy
Don’t be tempted to use a balance transfer credit card for new spending, as most credit card providers use a payment structure known as negative payment hierarchy.
Simply put, while you might consider your credit card debt as one lump sum, your provider won’t. So, your balance transfer debt will be considered as separate to your purchase debt or cash withdrawals. This means that when you make payments, your money will not be used to pay off the debt as a whole. Instead, your provider will use your payments to clear the cheapest balances first.
Imagine you have a credit card with a £1,000 balance bought over from a previous credit card and a £500 balance of new purchases. The balance transfer element of your debt is currently interest-free, whereas you are being charged 17% APR on your purchases debt.
Let’s say you make a payment of £500. While you might assume this will clear your purchase debt, leaving you able to pay off your balance transfer without attracting any interest, this is not the case.
With a negative payment hierarchy credit card, you will need to make two months’ payments of £500 before your balance transfer is paid off. In the meanwhile, your £500 purchase balance is attracting interest of 17%.
Nationwide and Saga are the only two credit card providers that use positive (rather than negative) payment hierarchy – so the most expensive debts are cleared first.
4. Don’t miss payments
Different card providers offer offer different interest-free periods (see below) and they will also have different minimum monthly repayments.
Even if you intend to repay the entire balance at the end of the interest-free period, you will still have to make repayments every month – miss a payment, and the provider is likely to cancel the introductory period and hit you with interest and even penalty charges.
The best debt-busting balance transfer cards
Virgin Money’s MasterCard offers 0% interest on balance transfers for the first 16 months from the date of issue (as long as these are made within the first 60 days) - after this time, you'll pay 18.6% AER on outstanding balance transfer amounts.
Although there is no annual fee, a balance transfer fee of 2.98% (of at least £3) applies.
The card also offers 0% on all new purchases for the first three months from the date of issue.
After this time, you will get 50 days to pay off your balance before an of APR 16.6% applies.
This card also offers interest-free money transfers for 16 months, but this jumps to 20.6% APR after this time.
The Santander Credit Card offers 0% balance transfers for 15 months, plus a 3% fee (of at least £5). After this time, expect to pay interest of 15.9% on any outstanding balance transfers.
You'll also recieve 0% interest on purchases for the first three months, but remember that negative payment hierarchy applies.
After the introductory period, interest on purchases reverts to 15.9% - although you will receive 56 days to pay off your balance before this is charged on purcahses.
Egg Visa offers 0% on balance transfers until 1 March 2011 (plus a 3% fee) from the date of transfer, after which time the APR reverts to 16.9%. Purchases are interest-free until 1 March 2010 - the APR will then revert to 16.9%.
This card offers discounts with selected retailers, has no annual fee and gives you money off Egg insurance products. One the 0% period has expired on purchases, you have 45 days' interest-free.
Halifax Plus MasterCard offers 0% on balance transfers for 13 months (3% fee), and 0% on purchases for three months. The typical APR is 16.9% but you'll have 59 days' interest free to pay off your balance before interest is charged.
Finally, Nationwide Classic Visa card offers 0% on balance transfers for 13 months (3% fee of at least £5) and 0% on new purchases for three months. The typical APR is 16.9% but you'll have 56 days to pay off your balance before interest is charged.
This is the only card listed here that won't use your payments to clear the cheapest debts first.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Moving money from one account to another, whether switching bank accounts or more likely transferring the outstanding balance on your credit card to another card that charges a lower – or 0% – rate of interest. Some card providers may charge a transfer fee that can be a percentage of the balance transferred.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
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