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Balance Transfers

With more credit cards than people in the UK, and with each of us having on average 4 credit cards in our wallets, the balance transfer market has expanded at an incredible and possibly unsustainable rate. In April 2006 credit card debt totalled £56bn, with an estimated 75% of cardholders paying interest on their balances. Alarmingly, the reported average rate of interest paid on this lending is 15.5%, compared to a base rate of less than a third of that amount.

So how can you get a better rate of interest and what pitfalls should you be aware of when researching balance transfer deals, Andy Britchford analyst at moneyfacts.co.uk investigates:

Despite many credit card providers suffering due to an increase in levels of bad debt, still we see competitive deals entering the market. Recent new entrant GE Money currently offers a market leading 0% for 12 months on both Balance Transfers and Purchases.

But for those of you, either tired of chasing the 0% deals or having used all the possible deals in the market, the new breed of lifetime balance transfer deals may provide an alternative solution, offering relatively low rates of interest on any monies transferred until the balance is fully repaid. This eliminates the need to regularly change providers, yet provides additional flexibility when compared to a personal loan with fixed monthly repayments.

Balance transfer fees are now a common feature of many deals, usually ranging between 2 and 3 percent of the balance, but do be careful, as many are uncapped, so for those transferring larger balances this could take the shine off of the interest free deal.

As with any deal, often those which offer unbelievable terms are often too good to be true, always ensure you read the full conditions of any offer. In particular with Balance Transfer deals, consider the type of rate required, whether a 0% deal for a limited time or a lifetime low rate and if any fee will be charged. But it is also worth delving a bit deeper in the terms and conditions.

But the real catch to these deals is hidden deep in the small print.  With most card providers repayments will pay the cheapest debt first. So if you have 0% balance transfer deals and purchases on the same card, when making a repayment it will firstly repay the money owed on the 0% deal, so all the time incurring interest at the higher purchase rate on the purchases balance.

If you are looking to use the card for purchases too, standard rates vary considerably, and in most cases you are unlikely to find a card which offers best buy rates on balance transfers and purchases, so to avoid loosing any savings made by obtaining your balance transfer deal it is worth considering keeping a separate card in your purse or wallet for your purchases.