Got Christmas debts to pay off? Shifting your debt to a 0% ‘balance transfer’ credit card can save you £100s (or even £1,000s) of pounds in interest payments. Find out how below.
January isn’t just known for alcoholic hangovers – it’s a time of financial hangovers, too, and you definitely need a rapid hangover cure as soon as possible.
According to research from the TUC, the average UK family won’t pay off their Christmas debts until June 2014. Ouch!
So if you’re feeling in need of some financial Alka-Seltzer, you’re not alone.
Curing your Christmas debt hangover
If you’re fed up of having a Christmas debt hangover, then it’s well worth considering getting a 0% balance transfer card.
These cards can be a fantastic money-saving tool – thousands of people use them every year (and after Christmas in particular!) to clear their credit card debt.
A 0% balance transfer credit card can save you £100s in interest payments
If you’re still learning how to get the most out of your money, you might think that getting another credit card (when you’ve already got debts) doesn’t make much sense.
But actually, a 0% balance transfer card can make a great deal of financial sense if you are in debt. Used responsibly, they are one of the best debt management tools available.
How they work
The concept behind 0% balance transfer cards is simple:
- You transfer existing card debts to a 0% balance transfer card.
- Once you’ve transferred the debt onto the card, you don’t pay ANY interest on that debt for a specified time. (Some cards offer 0% interest for up to 30 months).
In other words, a 0% balance transfer card is a bit like an interest-free loan – and they can save you literally hundreds of pounds in interest payments.
For example: if you have £2,000 of debt on a typical credit card charging 17% interest, you would save more than £250 over 2014 by shifting that debt onto a 0% balance transfer card.
What they’re good for
- Giving you breathing space to pay off your debts.
- Clearing your debts faster.
Because you get 0% interest, every penny you pay goes towards clearing your debt (instead of just paying off interest charges, which go straight into the pockets of your bank or credit card company).
Want to transfer your debt to a 0% deal?
Click the button below to compare the best 0% balance transfer card deals.
Are there any catches with balance transfer cards?
As with most things in life, there is a catch – but don’t let it put you off.
The main thing to be aware of with these cards is the ‘balance transfer fee’.
In return for not charging you interest on your debt for months (or even years) on end, you have to pay a ‘balance transfer fee’.
Remember to take account of the balance transfer fee
This is a one-off charge that you pay when transferring your debt over to a 0% card.
The fee you pay is a percentage (normally between 1%-3%) of your debt that you are transferring to your balance transfer card.
Most cards with long interest free periods have a balance transfer fee of around 3% – but there are some cards that charge less.
So how much does the balance transfer fee cost? Well, if you transferred £1,000 of debt onto a 0% balance transfer card, this is what you’d pay:
- 3% balance transfer fee = £30
- 2% balance transfer fee = £20
- 1% balance transfer fee = £10
So always factor in this fee. But at the risk of repeating ourselves, DON’T let it put you off – as for many people a 0% balance transfer card will still be by far the cheapest way to pay off their debt.
(It’s far better to pay a small one-off balance transfer fee and then enjoy 0% interest, than it is to stick with your normal credit card and end up forking out hundreds of pounds in interest charges instead).
Our 0% balance transfer comparison table lists the balance transfer fees of all the cards listed, which range from 3% – 0.9%.
The cards with the longest 0% periods tend to have higher balance transfer fees. So if you can pay your debt off over a shorter period of time (e.g. 12 months rather than 30 months) then you could go for a card that has a shorter 0% period but a lower balance transfer fee.
Follow the 3 golden balance transfer card rules
Once you’ve got your new 0% balance transfer card, it’s a good idea to follow the three rules below:
Clear your debt before the 0% period ends
0% balance transfer cards are brilliant for paying off debt – but only while their cheap 0% rate lasts.
After the 0% period is over, the interest rate on these cards goes up from 0% to between 16%-20% – so make sure you budget to have cleared your debt by then.
(If you find yourself coming to the end of your 0% period and you still haven’t cleared your debt, the next best thing to do is shift your debt again to another 0% balance transfer card – so you still pay 0% interest).
Luckily, with cards offering 0% interest for over two years at the moment, you should have plenty of time to pay off your debt without paying any interest.
Make at LEAST the minimum repayments each month
Even with 0% cards, you’ll still need to make at LEAST the minimum repayments each month (if you don’t, many card providers will yank you off your 0% deal and put you on a high interest rate).
But you should aim to make MORE than the minimum monthly repayments anyway. Why? Because credit card companies design their minimum payment amounts to make your debt last as long as possible. They do this on purpose – because it means you end up still having debt after your 0% period ends. So you start paying them interest – and they make money out of you!
So make sure you don’t fall for their trick of just paying the minimum repayments.
TIP: If you find yourself struggling to pay more than the minimum amount each month, make sure you look at our guide how to get debt-free in 10 simple steps.
0% balance transfer cards are fantastic if you want to transfer your debt onto them. But they’re usually bad for spending on. This is because while these cards offer 0% on your debt, they often charge hefty interest fees on any purchases you make on the card.
So if you want a credit card for buying things, get a 0% purchase card instead.
Don’t forget to check your credit rating
Before deciding whether to give you a credit card, banks will check your credit score (also sometimes called your credit rating).
Everyone in the UK has a credit rating – it’s just data made up of your payment history and past financial behaviour. You can find out more about how credit reports work (our article also shows you how to get your credit report for free).
Your credit rating not only determines what products your bank will give you, but how good a deal you will get.
For instance, most interest rates are ‘representative’. In plain English, this means that the interest rate on your credit card or loan may depend on your credit score.
So bear in mind if your credit rating is too low for the credit card you wanted, you might get rejected – or you might still be accepted by the bank, but they’ll only accept you for a different product.
Find out more about how your credit rating works.