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How to borrow for free
The introduction of a new best buy balance transfer card means you can realistically shift your existing card debt so that you effectively pay nothing for it. We uncover how it works.
Image: Martin Keene - PA Photos
When you borrow on a credit card or loan to pay for luxuries, the usual result is that you will become poorer, and will be able to buy less stuff for the rest of your life. This is because you have to use some of your income to pay debt interest. As a result, someone with the same income as you who does not borrow will never pay that interest and will, therefore, be able to buy more than you.
That's why it makes sense to borrow only if it will improve your financial position. This could be borrowing to study, to get a car essential for work, or to buy your own home.
Don't despair if you already have existing credit card debts, though. You can still reduce the cost of servicing that debt and therefore increase what you will be able to buy over your entire lifetime. And thankfully, if you are in this position, there are currently some credit card deals available that will, under certain circumstances, make your borrowing completely free for over a year.
The new leader among these products is the Platinum card from Barclaycard. It now offers a 0% balance-transfer period lasting 17 months, along with a 2.9% fee. As I'll soon explain, if you use the card correctly, the borrowing will actually be free in real terms.
The cost of balance transfer fees
Fees can be deceptive. For instance, paying a 3% balance transfer fee is actually equal to more than 3% interest. This is because you pay it up front and on the whole balance. If you pay interest, on the other hand, the cost is spread across the year on what is usually a reducing balance.
That's why a 3% fee on a card offering a six-month deal could even work out at the same cost as 11% annual interest. As I said, fees are deceptive.
Broadly speaking, the longer the deal and the lower the fee, the better. If you transfer a balance to the Barclaycard Platinum and pay it off in equal instalments over the 17 months, this works out as the equivalent of 3.91% interest per year. Much better than 11%, but still higher than the 2.9% fee suggests.
If your transfer is for more than £3,000 and you do it before the end of January, Barclaycard will give you £20 off the fee, which will reduce the effective interest rate further.
This is free money
3.91% might not sound free to you, but here's why it is. Currently, average inflation is running quite a lot higher, at 4.8%. This is also likely to rise a fair bit further in the coming month when increased VAT figures are taken into account, and inflation on the whole is expected by many to remain relatively high all year.
When the cost of goods is increasing at a higher rate than your debt interest rate, it means that your debt is becoming devalued and, therefore, easier to pay off. In real terms, then, you technically aren't paying anything for your loan under these circumstances.
In fact, so long as the basket of goods that you buy goes up in price faster than the effective interest rate of 3.91% this year, you could even say that your loan is paying you.
It still works with other cards
Other balance transfer credit cards are nearly as good as the Barclaycard Platinum and could also work out free for you this year if used correctly. At present there are six cards with free balance transfer periods lasting 16 months and another six lasting 15 months. With a 3% fee, that works out at the equivalent of 4.28% and 4.53% annual interest respectively - both of which beat inflation at its current level.
Play your cards right
This technique only works if you don't pay off your 0% card debt too early. Spread the payments equally over the interest-free period, and, if you have the money to pay it off faster, put it in an easy access savings account instead. Then you are earning interest on the money you are borrowing, which will improve the economics even further.
To boost the interest you earn and reduce the effective rate you're paying even more, you could pay off just the minimum monthly repayment, saving the difference in a savings account. With the Barclaycard, that should work out on average at roughly £50 per month you are saving per £1,000 of debt. Then you can just pay off the balance in the last month of the deal.
Using that technique with the Barclaycard Platinum and the Post Office Online Saver, which pays 2.9% AER, your effective interest rate will go down to less than 3% overall. After inflation, you should then be making a reasonable profit.
This is a strange system that only works when your costs are up front, such as with transfer fees, and when the repayment period is very long. If you are being charged interest rather than fees, the best way to reduce the interest you pay, and increase the amount of luxuries you can buy in your lifetime, is to pay off the debt as fast as you are allowed to, and to switch to cheaper deals.
I feel the credit card is just about buying credit. Consumer trends just forecast statistics.
Responsible borrowing just its market I feel should be managed in such a way as well.
Please note that articles on MSN Money do not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The articles are intended to provide general personal financial information. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. You can search for an IFA in your local area. Any statement regarding financial services products and tax liability is based on legislation and tax practices as at 6 April 2011, which is, of course, subject to change. The value of any tax benefits or reliefs depends upon the individual circumstances of the investor. When investment performance is mentioned you should remember that past performance is no guarantee of future performance. Where products have an underlying investment content, in many cases the value of the investment can fall as well as rise. For with-profit based investments, there is no guarantee as to the level of bonuses that will be declared, if any. Where mortgages or secured loans are explained do remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All mortgages are subject to underwriting, status and are not available to people under the age of 18.
A new study suggests a typical financial emergency costs around £1,200 - would you be able to raise that kind of money within a month?
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- Yes - from my savings
- Yes - I could put it on credit
- Yes - I could borrow from family or friends
- No - raising that kind of money in a month would be impossible