Part 1: How Do 0% Balance Transfer Credit Cards Work?
THINK of a 0% balance transfer credit card as your personal 'debt manager'.
If you have a balance accruing interest on an ordinary credit card, you can move the amount onto a 0% balance transfer credit card and just pay off your debt without giving any more money away to your credit card provider.
Unlike life of balance transfer credit cards, which have one low rate forever, a zero percent rate will only ever be available for limited time - anything from a few months up to 16 months.
0% balance transfer credit card deals
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How much can I save?
Credit cards are an expensive form of borrowing because they accumulate compound interest. With a zero percent credit card you can break the cycle of accumulating an ever-larger debt and just pay off what you owed originally.
For example, say you have a credit card with an outstanding balance of £3000 and a 16.9% interest rate. You decide to pay off £200 a month. The table below shows where you would be in twelve months if you left the balance on your current credit card, compared to moving it to a 0% balance transfer deal.
| |
If you keep using the 16.9% credit card... |
If you move the balance to a 0% credit card… |
| Interest paid after 12 months |
£350.98 |
£0 (+ £90 transfer fee*) |
| Balance on the card after 12 months |
£1150.98 |
£890 |
* Note: the balance transfer fee has been calculated using an average fee of 3%.
What's the catch?
The problem with 0% balance transfer credit cards is that they only offer their low rate for a limited period.
The introductory rate usually starts as soon as you get your new credit card and continues for a number of months. After the 0% deal is over the credit card will go back to a high interest rate.
Companies that offer zero percent balance transfer deals hope that once your 0% deal is over you’ll go back to paying interest, so the credit cards are really a way for them to poach business from other providers.
However, there's no reason why you should go back to paying interest as long as you either:
- Budget well: so that you pay off your whole debt within the introductory period
or...
- Become a credit card tart: move to another 0% deal before you have to pay interest.
Another important point is that you usually have to pay a fee to move your balance from your old credit card. This is typically around 3% of your current balance and is payable to the card issuer you are moving your balance to.
Sometimes 'capped transfer fees' are offered. This means that no matter how large your outstanding liability is, you will not have to pay over a certain amount to transfer your balance. Such fees, where offered, are usually capped at between £50 and £100.
However, the fee itself will far outweigh the interest you’ll save by moving your balance so as long as you budget for the fee it shouldn’t pose a problem.
Some of the longest 0% balance transfer credit cards:
What if I don’t have a credit card debt?
If you don't have a big debt, 0% balance transfer credit cards can also give you a short-term loan at zero percent interest.
This is often termed as 'stoozing', and involves moving the 0% credit to a bank account (if the card allows you to do this - see our best buy guide on Super Balance Transfer credit cards.
You can then choose to use the money like a loan, and simply make monthly repayments to clear the debt, or you can put the cash in a high interest savings account, make the minimum monthly repayment on the 0% credit owed, clock-up some interest from the savings account, and then pay back the entire 0% credit just before the 0% period ends.
On the face of it, it’s a cunning way to make a little money back from competitive credit card companies but stoozing is risky: you need to be exceptionally diligent with your finances, and it's very important to pay back the money in the 0% period or you risk losing the money saving benefits.
For more information on Stoozing see the how to use balance transfer credit cards section. For more information on what to look out for read on in part 2: how to compare balance transfer credit cards section.
Part 2: 