Balance-transfer credit cards have become much more common and popular over recent years. They allow you to move a debt from one card to another which charges a lower rate of interest or no interest at all for a certain period. This helps cut your outgoings and gives you a longer period to pay off what you owe.
So how do you make the most of a balance-transfer credit card deal?
1. Check the credit card transfer fee
In best-buy tables, balance-transfer cards are usually ranked by how long their interest-free periods are.
But there is another important factor to consider: balance-transfer cards charge an initial fee, which is a percentage of the sum you are moving.
For example, a card offering 24 months interest-free may charge 3% while an alternative 15-month zero-interest card charges just 1.5%.
On a debt of £10,000, this would equate to £300 and £150 respectively.
If you are confident you can clear your transferred debt within 15 months, the card with the lower fee is likely to be a better bet.
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2. Clear your debt during the interest-free period
Balance-transfer cards are a cheap or free way to borrow within the interest-free period. But rates can leap to as much as 20% a year as soon as this period ends.
If you don’t clear your debt by this point, you’ll start racking up interest charges at a fast rate. Divide your total debt by the number of months you have interest-free and set up a direct debit or standing order to pay off this amount every month.
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3. Don’t miss credit card repayments
Most lenders stipulate that you have to make at least a minimum repayment on your credit card every month – as an example, this might be the greater of 3% or £5.
In the small print on many 0% balance-transfer cards, however, is a clause stating that any borrower who misses a monthly repayment will have their interest-free deal withdrawn.
This means the full interest rate of typically around 20% a year will be charged on the debt from this point on, and could prove extremely expensive.
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4. Check the spending rate on your credit card
If you have a 0% balance-transfer card, it doesn’t necessarily mean that any new spending on the card will be interest-free. If you want to use your card for both purposes, check the rate before you sign up.
Low-interest balance-transfer cards often have a significantly higher rate of interest for new purchases.
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