Something for nothing credit cards – or hidden costs?

11th November 2012  

Nobody wants to pay more for anything than they really need to, especially during such dour economic times. And we all love a deal that appears to give us ‘something for nothing’. So the attraction of interest-free credit cards is obvious – transfer an existing debt onto a clean, fresh, ‘zero percent on balance transfers‘ card and you can save yourself a fortune in interest charges, right?

Well, yes, but there is one thing that you will need to watch out for, and that’s transfer fees. A few years ago, the best you could hope for would be 12 months of interest-free credit. Now that’s almost doubled (some cards are offering up to 24 months interest-free on balance transfers). But as the time frames have increased, so too have the balance transfer charges – in some cases quite dramatically.

A clutch of cards are tempting hard-pressed consumers with 23 months’ worth of effectively ‘free’ credit, but whereas six years ago you’d be paying around 1.3% balance transfer fee, these long-term freebies are ratcheting up the fees to around the 3.5% mark. So on a balance transfer of £5,000, that could add an extra £175 to your overall debt.

Shorter period, smaller charges

However, if you look for a shorter interest-free period with a lower transfer fee attached, you could save a considerable amount of money. For example, NatWest’s Platinum low balance transfer fee card gives you 13 months interest-free, but charges just 1% balance transfer fee. That would mean you’d pay just £50 on a £5,000 transfer – a saving of £125 that you could use towards paying off even more of the original debt.

Of course, the more often you card-hop, the more often you get stung with balance transfer fees, so the trick to smart debt management is to ensure that the benefits always outweigh the costs. While 20 months’ interest-free may be tempting, it could actually be cheaper to go for a shorter interest-free term of around 12 months, but with a lower transfer fee. This combination is probably more appealing to those with smaller debts who want to pay them off as quickly as possible. For anyone with a heftier debt, a longer term 0% deal would allow them to chip away at the debt and make larger inroads into reducing the amount they owe, even taking into account the higher balance transfer costs.

Financial swings and roundabouts

What this scenario boils down to is a game of financial swings and roundabouts, so before you get over-excited at the prospect of 24 months interest free credit, it’s essential that you do the maths. It’s also essential that you’ve got a healthy credit score, as a ‘computer says no’ rejection never looks good on your record. The more refusals you get, the worse the situation becomes and repeated refusals on balance transfers can lead to quite serious damage to your credit score.

The longer term balance transfers of 24 months can also be next to impossible for anyone who doesn’t have a spotlessly clean record to obtain. So if you think there may be a blip on your record, aim lower and go for more accommodating providers. It may mean that you have to go for a shorter interest-free term, but the added advantage is that you will also probably be paying much less in balance transfer fees too.

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