How I saved money with a balance transfer card
Image © David Jones - PA Archive
January is a terrible month really. The weather's rubbish and everyone is broke after their Christmas/New Year exertions.
If you're weighed down by the thought of a monumental credit card bill headed your way, what should you do? I know what I did when I was in a similar position a few months back: I took out a 0% balance transfer card.
The 0% balance transfer card
The name is a bit of a giveaway. A 0% balance transfer card allows you to move over a chunk of debt onto the card, and enjoy a set period in which you won't pay any interest on that balance.
I'd just had to buy a new car seat and cot for my little boy, and with my wife's statutory maternity pay coming to an end, I had about £800 on my credit card that I knew I would not be able to clear in one go. A 0% balance transfer card looked perfect to me as I could spread the payments, breaking that debt down into a few easy, manageable chunks.
Finding a card
The first thing to consider is which banks' cards you'll be able to transfer that debt to. For example, if you have a credit card with Bank of Scotland, you won't be able to transfer that debt to a card from Halifax, as they are part of the same group. Similarly, you can't move debt from an MBNA card to a Virgin credit card.
If you're unsure about which banks may be part of the same group as your existing card's provider, check out this section of the FSA's website for more info.
In my case, I was moving money over from the Tesco Clubcard credit card, so thankfully I had a free choice in terms of picking a credit card provider.
How long do you need?
The next thing to work out is how long you need in order to pay off that debt. It may be that you want to go for the absolute longest 0% period possible, in order to give yourself the maximum breathing space and relatively small monthly repayments.
If that's you, then the current market leader from Barclaycard is probably best, as it offers an impressive two years free from interest. Here are the top 10 cards that offer the longest 0% period at the moment:
| Card | 0% period | Transfer fee |
|---|---|---|
| Barclaycard 24-month Platinum | 24 months | 3.2% |
| HSBC Visa | 23 months | 3.3% |
| Halifax MasterCard | 22 months | 3.5% |
| Barclaycard 22-month Platinum | 22 months | 2.9% |
| Barclaycard 21-month Platinum | 21 months | 2.6% |
| Virgin Money MasterCard | 20 months | 2.99% |
| RBS Platinum MasterCard | 20 months | 2.9% |
| Halifax 20-month MasterCard | 20 months | 3% |
| Creation 20-month Balance Transfer | 20 months | 3.2% |
| Bank of Scotland Plus MasterCard | 18 months | 3% |
However, as the debt I was moving over was relatively small, it felt a bit over the top to go for a card with a two-year 0% period.
In the end I settled on a card offering 14 months at 0%, which I felt gave me plenty of time to clear that debt.
The transfer fee
The next thing to consider is the fee that you'll pay for transferring the debt - obviously the providers don't just let you skip interest out of the goodness of their hearts.
With balance transfer cards, you have to pay a fee in order to move that balance over. And that fee is a percentage of the balance you move over, typically around 3%.
The card I went for charged 2.8%, which at the time was about as good as it got. That came to a little over £22.
Now though, the market is more competitive and there are a few cards offering decent 0% periods with much lower transfer fees.
Here are two of the best:
| Card | 0% period | Transfer fee |
|---|---|---|
| Barclaycard Low Fee Platinum | 16 months | 1.6% |
| Virgin All Round credit card | 16 months | 1.99% |
How much I've saved
I'm currently paying £57 a month in order to clear the balance before the 0% period comes to an end. With eight months to go, I've got £458 in outstanding debt.
However, if I had left the debt on my Tesco card and was making the same £57 monthly payment, I'd have a bigger outstanding debt. That's because a big chunk of my monthly payments would be going towards interest.
On the Tesco Clubcard, the monthly interest rate is 1.667%, so let's do a little maths and see what my debt would look like now:
| Month | Balance before interest charged | Interest charged | Final balance |
|---|---|---|---|
| 1 | £800 | £13.34 | £813.34 |
| 2 | £756.34 | £12.61 | £768.95 |
| 3 | £711.95 | £11.87 | £723.82 |
| 4 | £666.82 | £11.12 | £677.94 |
| 5 | £620.94 | £10.35 | £631.29 |
| 6 | £574.29 | £9.57 | £583.87 |
And this is what has happened with my balance transfer card. Remember I'm still paying £57 a month:
| Month | Balance before interest charged | Interest charged | Final balance |
|---|---|---|---|
| 1 | £800 | 0 | £743 |
| 2 | £743 | 0 | £686 |
| 3 | £686 | 0 | £629 |
| 4 | £629 | 0 | £572 |
| 5 | £572 | 0 | £515 |
| 6 | £515 | 0 | £458 |
With the 0% card, my outstanding debt after six months is £458. If I hadn't transferred the debt from my Tesco card, my outstanding debt would be £583.87, which means I've save saved £125 - and that saving will grow with every month that passes.
I think that's a pretty impressive sum, especially as the original debt was relatively small.
Balance transfers not for everyone
Clearly balance transfers are a cheaper option than simply allowing your debt to rack up interest. However, that's not to say they're always the best option for everyone.
For example, if you have debt that you're able to clear in two or three months, it can actually work out cheaper keeping the debt on a higher interest card than it would paying a hefty admin fee to transfer the debt to a 0% card.
Conversely, for anyone with really big debts that they won't be able to clear within the initial 0% period, it's essential you remember to switch the debt immediately or you'll just be racking up massive debt once more. If you don't think you're diligent enough to do this, you might want to consider a low-rate-for-life balance transfer card, or perhaps even a personal loan.
