Don't be ripped off by a 'free' balance transfer
Borrowers could be caught out by hidden balance transfer fees with just one in 20 understanding the true cost of 0% interest deals.
A survey of consumers by Which? found just 4% of respondents could correctly say what they'd be charged for a 0% interest balance transfer.
A quick look at the tables at Moneywise.co.uk/compare shows the longest 0% balance transfer deal on the market – Virgin Money's Virgin Balance Transfer Credit Card (37 months) – comes with a fee of 2.79%. This means that a borrower moving a balance of £3,000 to the card would be charged £83.70.
However, when questioned by Which?, more than two-thirds (68%) of people thought a transfer would be free, even when shown details of fees.
And when given the choice between three cards, a third of respondents picked a card that would have cost £80 more than the best deal on the table.
The consumer group has proposed changes to make balance transfer fees clearer, including showing fees in pounds and pence, rather than as a percentage, or banning firms from advertising balance transfer deals as 0% when they carry a fee.
Which? executive director, Richard Lloyd, said: "Too many credit card deals appear to include sneaky fees designed to catch customers out.
With millions now using credit cards to pay for essentials, it's vital that the Financial Conduct Authority takes action to ensure consumers are well protected. We want the regulator to scrutinise balance transfer deals and make it easier for people to understand their true cost."
Which? estimates a fifth of new cards issued in the past two years were for balance transfers, and recent figures from the UK Cards Association said 42% of all UK credit card balances incurred no interest.
How to find the right balance transfer?
Providers are jostling to offer the longest 0% balance transfer deals, with several offering to charge no interest for at least three years. However, these ultra-long deals include transfer fees of between 1.75% and 2.79%, which, as mentioned above, could cost up to £83.70 for a £3,000 balance.
However, several cards offer generous 0% balance transfer periods and no upfront fees. Providing you repay the minimum balance each month and don't go over your credit limit, these can work out substantially cheaper.
The newly launched Halifax Balance Transfer Card offers the longest fee-free 0% deal. There's no interest to pay on balance transfers for 20 months and purchases are also interest free for the first six months. After the introductory rates end, the card has an 18.9% representative APR.
Alternatively, the Tesco Bank Clubcard Credit Card has the option of 19 months 0% interest on balance transfers, again with no fee. It'll charge you no interest on purchases in your first month and also give you five Clubcard points for every £4 you spend in Tesco, and one point for every £8 you spend elsewhere.
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.
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%.