In 2016 there is a lot of competition to get the top spot in the credit card best buy tables. At the moment (August 2016) Virgin is top of the “longest deal” table with 41 months at 0% for a 4% fee. Tesco has a 24 months 0% offer with no fee at all.
You can see the current “best buys” for balance transfers here – if you know you can clear the balance soon, then look for a zero or very low fee transfer, if you think this is being too optimistic then look for the longest 0% period you can get,
Those are some great deals – so good that you may be wondering what the catch is?
How do banks make profits from these bargain offers?
Banks make money in four ways:
- up-front fees the fees on the above 40 month deals are great value, but some other shorter offers aren’t nearly as good;
- borrowers losing 0% deal if you miss a payment, are late paying or go over your credit limit, the 0% deal will be be ended and you are back to high interest rates;
- borrowers using card for new purchases The car companies get a small transaction fees from the seller every time a card is used to buy something. And the borrower has to pay interest on new purchases.
- high interest charges after the end of 0% period RBS, who stopped offering 0% transfers a couple of years ago, said that over a third of their borrowers kept balances on the card for more than seven months after the 0% period ended.
As you may have spotted, most of these ways for banks to make profits only work if you forget something!
UPDATE: new research finds that 3 million Britons have lost their 0% deal, many of them in the very first month!
So get organised!
None of these ‘problems’ should stop you from taking out a 0% credit card if your credit rating is good enough to be offered one. You just have to be organised so that you take advantage of the deal and the lender doesn’t take advantage of you!
First, don’t rely on your memory to make those minimum monthly payments. You may think you are not going to forget, but a busy period at work, a nasty dose of flu or a family crisis can spoil your good intentions. By missing a payment or making it late, you won’t just lose this 0% offer, you are likely to get a black mark on your credit rating which will make it hard to get another one.
The best thing you can do is divide the debt by the number of months in the offer and set up a standing order for that amount. That means at the end of the deal you are debt free, so say thanks to Mr CardCo for the really cheap loan for 3 and a half years!
If you don’t think you can afford this every month, then set up a direct debit so that the credit card company always takes the minimum amount each month. Then overpay this whenever you are able.
Second, it’s vital that you don’t forget when the 0% period finishes. If you have a diary, make an entry one or two months before the deal ends to remind you to start looking for a new one. Or sign up to MoneySavingExpert’s Tart Alert, which will email or text you when there is 6 weeks to go.
Third, don’t be tempted into spending on your balance transfer card – leave it at home or even better, cut it up!
The aim is to clear your debt
The best use of 0% balance transfer credit cards is to let you pay off the debt in the cheapest way, not keep on shuffling it at the end. This is a golden time for borrowers with good credit ratings, so take advantage of it to clear your debts. This may not seem important now, with interest rates being so low, but this is the only time it is easy for you… in a few years time when rates have gone up, much of your monthly payment will be swallowed up by interest charges.
This is especially important if you may want to get a mortgage or remortgage in the next few years. The changes to mortgage lending rules in 2014 mean that you will be asked a lot more questions about your outstanding debts. Even if you think they are fine because they are at 0%, you may fail the new stringent affordability criteria, see Can I get a mortgage with debts?