0% Cards Can Come With A Sting

Come the end of January, a million people in the UK will have transferred their credit card balance to a new provider in an attempt to keep on top their finances. Research by Abbey suggests that the average amount transferred will be £2,666.

The idea of a transfer is to move a balance to a 0% credit card, thereby saving themselves hundreds of pounds in interest payments. The trouble is that these days the transfer fees that accompany the move can be very high, and anyone then making the mistake of buying items on the new card will be in for an even bigger shock.

The problem is that nearly all balance transfer offers charge a higher rate of interest on spending and providers require borrowers to pay off the transferred balance before paying off any new spending, so the new debt builds up interest until the transferred debt is paid off. It's called 'negative order of payments'.

The only major card providers to operate a positive order of payments are Nationwide Building Society and Saga. Currently Nationwide has a 0% balance transfer deal available for ten months, with 0% on purchases for three months, coming with a 2.5% transfer fee. The Saga Platinum deal is only available to over-50s; it gives six months for 0% transfers and purchases with a 2% fee.

Nationwide calculates that a cardholder who switches a balance of £1,300 to a 0% balance transfer card and continues to spend £300 a month on the card would end up over £100 worse off over a year with a negative rather than a positive order of payments. This is calculated on an interest rate of 15.9% for new purchases.

Samantha Owens at independent data compiler Moneyfacts says: "The main message for borrowers transferring a balance is always to read the small print and check out the way interest will be charged if you intend to spend on the card. Some cards offer a 0% deal for balance transfers and new purchases - but the majority impose different rates on the transferred balance and new spending. If borrowers know they need to keep using a credit card, it may be preferable to have two cards - one to clear a balance and the other for new spending."

Halifax has a 0% balance transfer deal for 13 months, with 0% on purchases for six months; the transfer fee is 3%.

Anyone looking for the longest possible deal and meaning to make no purchases could look at Virgin Money's 15 months 0% deal with a 2.98% fee. There is also Mint's card at 0% on transfers until March 2009 with a 2.9% fee, and Egg has a 0% transfer deal until April 2009 with a 3% fee.

Transfer of the average £2,666 would therefore cost around £77.

There is a 0% card on offer from Britannia Building Society for both balance transfers and purchases with no transfer fee. However, the deal lasts for only five months.

At the end of the deal interest rates on some of the 0% balance transfer cards rise to about 15 or 16%, so cardholders who think they may forget to switch their balance after the deal ends should choose a card with a low rate for the life of the balance.

Published on January 30, 2008