Hidden risks in 0% balance transfer cards


By the end of the month, 1m people will have transferred their credit card balance to a new provider as part of their financial spring-clean. Borrowers will have switched an average of £2,666, according to research by Abbey bank.

Eva Grossman

In control: Eva Grossman moved her card balance to a 0% Abbey deal to pay for a car

By moving to a 0% balance transfer card, borrowers can shave hundreds of pounds from their interest repayments. At least, that is the lure.

But switchers can be hit with high fees to move a balance, and those who then spend on the new card could get further nasty shocks.

This is because with the majority of balance transfer card offers, interest will be charged at a higher rate on new spending than on the switched balance. And worse, most card providers require borrowers to pay off a transferred sum first before clearing any new spending.

In the meantime the new debt will be building up interest at a much higher rate. This is known as 'negative order of payments'.

Nationwide Building Society and Saga are the only major card issuers to operate a positive order of payments. Nationwide offers a 0% balance transfer deal for 10 months and 0% on purchases for three months. It charges a 2.5% transfer fee.

The Saga Platinum deal, available to the over-fifties, allows six months at 0% for balance transfers and purchases with a 2% fee.

With a positive order of payments, card repayments always go towards paying off the most expensive debt first.

Nationwide research shows that a cardholder switching a balance of £1,300 to a 0% balance transfer card but who continues to spend £300 a month on the card would be more than £100 worse off over a year if the card has a negative rather than positive order of payments. This is based on an interest rate of 15.9% for new purchases.

Samantha Owens at independent data compiler Moneyfacts says: 'The main message for borrowers transferring a balance is always to read the small print and check out the way interest will be charged if you intend to spend on the card.

'Some cards offer a 0% deal for balance transfers and new purchases - but the majority impose different rates on the transferred balance and new spending.

'If borrowers know they need to keep using a credit card, it may be preferable to have two cards - one to clear a balance and the other for new spending.'

As well as Nationwide, Halifax has a 0% balance transfer card for 13 months, plus 0% on new spending for six months. There is a 3% transfer fee. Barclaycard's-Flexicard and Sky Card, plus Capital One Platinum, also have 0% deals for both balance transfers and purchases. Transfer fees are 2.5%, 2.99% and 1.7% respectively.

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For those who want the longest balance transfer term possible, and do not intend to spend on their card, there are fewer deals - but some are worthwhile.

Virgin Money is offering 15 months interest-free on balance transfers. Mint, part of the RBS group, has a 0% transfer deal until March 2009 while Egg offers a 0% deal until April 2009.

However, all three cards have high balance transfer fees of 2.98%, 2.9% and 3% respectively. This means that to transfer an average £2,666 balance will cost about £77.

Britannia Building Society has a 0% interest card for both balance transfers and purchases with no transfer fee. But this deal lasts for just five months so borrowers may be better off over the long term, depending on the size of their debt, with a longer 0% term.

Eva Grossman

Eva Grossman (pictured), 24, from Pinner, Middlesex, is in the process of switching a £600 card balance from Nationwide to Abbey. The Abbey deal offers 13 months at 0% for transfers and Eva, who works in a shoe shop, hopes to have cleared the balance in that time.

There is a transfer fee of 2.5%, which means Eva will have to pay £15 to take out the Abbey card, but she feels it is well worth the charge.

'I recently bought a car and had to use my credit card towards the purchase,' she says. 'I didn't want to end up paying a lot in interest while I cleared the debt so the Abbey card looked attractive - even with the fee.'



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Another pitfall of 0% balance transfer cards is that if borrowers are unable to repay the debt in full during the offer period and they don't switch away at the end of the term to a new zero per cent card, they will usually be hit for high interest on the outstanding balance.

Interest rates on some of the 0% balance transfer cards rise to about 15 or 16% after the offer period ends.

Cardholders who think they are likely to forget to switch their balance at the end of the offer period should opt for cards with a low rate for the life of the balance.

Barclaycard's Platinum Life of Balance Visa, Citi's Gold and Platinum cards and Leeds Building Society all offer such deals with charges of 5.9%, 5.8% and 5.9% respectively.

The rate is fixed until the transferred balance is cleared, but it does not apply to new spending.

Hidden risks to watch for in 0% balance transfer cards

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