Banks, building societies and credit card firms are currently locked in an escalating battle to win your debt.
In recent months the interest-free period on balance transfer credit cards has been growing and growing. Right now it is possible to pay no interest on your credit card debt for over three years.
The problem is choosing the right credit card for you isn’t as simple as picking whoever is offering the longest interest-free period. Research from Which? has found that only one in 20 of us actually understands the fees involved in zero per cent balance transfer credit cards.
So, here’s how to find the right card for you.
1. Nothing in this life is free
It is easy to assume that a credit card that advertises itself as interest-free isn’t going to cost you anything. But you would be wrong. You still pay for most of these credit cards, they are just usually cheaper than standard credit cards.
A balance transfer card charges you no ongoing interest on any balances you transfer from another credit card. But you usually pay a one off fee for moving the debt. This is known as the balance transfer fee and can be as much as four to five per cent of your overall debt.
2. The longest deal isn’t the best deal
The industry does seem to like to confuse people when it comes to balance transfer cards. Look at the best buy tables and cards are listed in order of the longest deal, regardless of the balance transfer fee.
In order to get the best value deal you need to consider how much debt you have and how long it will take you to clear it. If you know can clear your debt in less than three years, take a look at credit cards with shorter zero per cent periods but lower balance transfer fees.
For example, if you have £5,000 of credit card debt and you plan to pay off £250 a month you will only need 20 months to do so. Opting for the longest offer – Virgin Money’s 37-month deal – would cost you £139.50 in fees.
If instead you went for Santander’s 23-month deal you wouldn’t pay a penny as it has a 0% balance transfer fee, saving you that charge.
3. Don’t use your credit card
You’ve found a great way to pay off your credit card debts. But if you don’t use the card properly you could end up making matters worse. Balance transfer cards don’t charge interest on debt you move across from another credit card, but obviously they do charge for new debt you accrue on the card.
If you use the same card for spending and don’t repay the full amount you spend each month the interest will start to mount up. Most of these cards have a far from competitive normal interest rate so be careful.
4. Loyalty doesn’t pay
Finally, once you’ve finished clearing your debts, or the zero per cent deal has run out, cancel the credit card. The interest rate after the debt has been repaid will be far from competitive – usually around 20 per cent APR.
Either move your remaining debt onto a new zero per cent balance transfer credit card. Or, if you are ready to start spending again, shop around for the best rate on purchases or the best cashback credit card.