Balance Transfer Credit Cards

by : StephanieStephanie Wendy

However, things have changed a little since Egg brought out the first zero per cent card in 2000, offering customers a six month break from their debt. Lenders got wise to the "rate tarts" who repeatedly moved their debt to avoid paying it off. Borrowers wanting to move their debt are now hard-pressed to find a card that doesn't carry a transfer fee.

If you're sure that you'll pay off your debt within the interest free period offered by your balance transfer card then this is still a very economical way of clearing your debt, despite usually having to pay around 2.5 per cent of the balance as a fee.

However, not all cards are the same and there are a few things that you need to make sure you take into account when choosing.

How much will I have to pay?

There are two different ways that your new lender will get money out of you; in the form of a fee or if you don't manage to clear your debt before your interest free period ends.

Typical balance transfer fees generally range between 2.5 and 3 per cent, though you might be able to find one where this is capped at around ?50 - though these cards are rare.

If you go for one with a percentage fee, you need to think about what this actually means in terms of your balance - a three per cent fee on a balance of ?3,000 will cost you ?90.

Also, if you don't manage to clear your debt before you start having to pay interest, make sure that you know what the rate will be. Money education charity CreditAction says that the average rate of interest paid on credit cards is currently 17.1 per cent - more than 11 per cent above the base rate - so take this into account when choosing your card.

If you don't think you'll be able to pay off your debt in the given time, you could be better off going for a low life-of-balance card instead that carries a set, low rate.

Where your payments go

All credit cards carry "tiered" interest payments. This means that when you pay money off your card, it goes towards the "free" or "cheap" debt first - those things that carry the lowest interest. Any higher interest purchases, or cash advances you make - that make lots of money for the bank - will be paid off last so that you pay interest on them for as long as possible.

The length of the zero per cent offer and whether purchases are included

When they first came out, the six month interest break offered by these cards was welcomed by consumers. But we've come to expect so much more - some cards now offer as long as 15 months interest free, while many also offer zero per cent on purchases for a time.

If you find a card with a low balance transfer fee and a long interest free period but which charges you for purchases, you might want to take out an additional card, with a low set rate for making purchases.

Which card to go for

Remember that if you will still have a substantial amount of debt on your card when the interest free period runs out, a balance transfer card might not be the best choice for you. Weigh up your needs as well as your discipline and the size of your debt; if you will need to continue making purchases on your card then make sure you won't be paying an extortionate rate on them, or have a second card for spending; if you don't think you'll be disciplined enough to pay the balance off before the interest rate shoots up, or if your debt if too big to make this possible, then look into a low life-of-balance card instead.

Make sure that you shop around before signing up to a balance transfer card and don't necessarily take one offered by your bank as it won't always be the most competitive. Using a price comparison site can be great as it allows you to search for the exact card you want and compare it to offers from other lenders.