How To Use Credit Card 0% Balance Transfer Loans

Get the Best Out of Banks Offering Interest Free Credit Deals

Aug 11, 2009 Richard Mudhar

Some credit cards offer a facility to transfer a balance from another card at 0% interest for a fixed period. These can save money but borrowers need to watch for traps.

The lure of free money is powerful, and in the past it was possible to make money from a 0% credit card balance transfer deal by taking the money and putting it on deposit earning interest. Sadly, the card companies have wised up to ways of making it almost impossible to make money in this way, but the 0% balance transfer deal can still save a lot of money compared to carrying the balance on an interest paying card.

For anticipated new spending it is possible to get a truly interest free loan using a 0% interest on purchases credit card, but the subject of this article is the balance transfer card offer. Usually only available to new cardholders, the borrower takes out a card, then nominates one or more cards that they would like to pay down with money borrowed from the new card. Clearly if the new card interest rate is 0% and the other cards are the usual 8-20% this is a great deal. However, the borrower must beware of a number of crafty tricks that make a 0% credit card balance transfer cost more than 0%.

0% Balance Transfer Credit Card Trick 1 - The Handling Fee

Most balance transfer cards charge a handling fee of 2-5%. Borrow £100 on such a card with a 3% handling fee, and the borrower in theory repays £103. There is an important rule with this:

Always ask to pay the handling fee up front!

Otherwise, the borrower ends up paying the standard interest rate on this handling fee, which may be up to 20%. The interest free offer only applies to the loan, not the handling fee, and once the handling fee is on there attracting monthly interest, the only way of stopping it is to repay the entire loan, handling fee and accrued interest. Repayments are nearly always applied to paying off the balance attracting the lowest interest first, to maximize the credit card company's profits from the borrower.

0% Balance Transfer Credit Card Trick 2 - The Handling Fee Plus the Short Loan Period

A loan for a year at 0% with a handling fee of 3% would, at first sight, look like a loan at 3%. Many offers, however, are for only 6 months or 9 months, making the effective interest rate for the loan 6% or 4% respectively.

0% Balance Transfer Credit Card Trick 3 - Applying Repayments to the 0% Loan Before Purchases

Most 0% balance transfer cards charge purchases at a higher interest rate, typical of credit cards. Unfortunately, repayments to the card are applied to pay off the cheapest loan first. Make the mistake of putting a $500 purchase on a balance transfer card carrying $1000 at 0%, and the entire $1000 loan would have to be repaid before the $500 gets repaid, so the purchase keeps on attracting interest until the interest free loan is repaid. The rule is simple, here:

Never purchase anything with a Balance Transfer credit card

0% Balance Transfer Credit Card Trick 4 - Penalty Charges for Missed Payments

Many card companies are very strict on missed, bounced or late monthly payments. They add late fees, and some companies even revert the entire loan to the standard rate for the slightest transgression of the payment terms. It is often worth signing up to the card provider's direct debit scheme for taking the minimum payment, but also setting a note in the diary for the all-important last payment to redeem the entire loan before the interest rate reverts to the credit card company's standard rate.

Use Balance Transfer Credit Cards Wisely and Carefully to Keep the Loan Cheap

Using balance transfer credit cards is only really something for the well-disciplined and well-organised. Catching borrowers out is, of course, how the credit card companies make their profits on a 0% card. The canny borrower makes sure that they are not one of the profitable customers. At the end of the deal, it is usually worth closing the card, since card companies usually only offer the 0% deals to new cardholders. Closing the card means that it is possible to become a new card holder with the same company in a year or so.

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Credit Cards Can Offer 0% Balance Transfer Loans