The “buy now, pay later” concept of credit cards is likely to hold increased appeal this year with finances so tight. However, if you find you’ve overspent as a result then you’ll need to do something about it – and fast.
What action can cardholders take?
As soon as your Christmas spending is done and dusted, move your balance over to a 0% balance transfer card. A 0% deal gives you a set period with which to pay off the debt without accruing any additional interest – as long as you don’t spend on the card. You will have to pay a balance transfer fee, which is added to your debt, but generally this will prove worthwhile with the cash you will save on interest payments.
The leading deal is available from the Virgin Credit Card, which offers 0% on balance transfers for 16 months with a 2.98% fee. This gives you the maximum amount of time with which to pay off your debt before it reverts to a typical rate of 16.6%.
Indeed there are a host of competitive deals available, including the Halifax Plus, which offers 0% for 15 months (if the balance is transferred within the first 90 days) albeit with a higher balance transfer fee of 3.5% and a higher typical rate of 16.9%. If you’d rather pay a slightly lower balance transfer fee, then the Barclaycard FlexiRate, Platinum and OnePulse Special cards all offer 0% for 14 months with a 2.9% balance transfer fee (2.5% with OnePulse) and a typical rate of 14.9%.
The key however, is to only use these cards to repay your debt – and not for additional spending. If you use the cards to spend then you’ll be caught in the negative payment trap, which means the cheapest debt is cleared first. So if your card had a 12-month interest-free period on balance transfers and a three-month interest free period on purchases, you’d be charged interest on spending as soon as the three months end. As your repayments go towards the cheapest debt first you’d continue to build up interest on purchases until the original balance is cleared in full.
The only way to avoid this and keep spending is to pick up a card that offers equal 0% periods for both balance transfers and purchases. The Halifax and Bank of Scotland All-in One Credit Cards offer 0% on balance transfers and purchases for 10 months (with a 3% transfer fee and typical rate of 15.9%). Other options include the Unite and Unison credit cards which both offer 0% on balance transfers and purchases for nine months with a 3% balance transfer fee and a typical rate of 14.9%.
Before applying for any of these deals, bear in mind that the leading rates are only available to those with excellent credit scores. For an assessment of the cards you’re likely to qualify for based on a snapshot of your credit profile, use our Smart Search tool.
Another way a 0% balance transfer card can help
If you’ve spent on a debit card this Christmas and find you’re fending off overdraft charges as a result, a 0% balance transfer card could be the solution.
Several credit cards, including those available from Virgin and Egg, have a ‘balance transfer’ facility allowing you to move any amount, up to your credit limit, into a current account. So if you have an overdraft piling up interest or debts to pay off elsewhere, transferring the money to your current account could be a good option.
However, before taking this step bear in mind that you will have to pay a balance transfer fee and because of this simply relocating the money to spend on goods would be ineffective – especially when you could use a 0% purchase card. You should also ensure you can stick to your monthly repayments on the card and that you can repay the balance before the end of the promotional period so you don’t end up paying the typical interest rate on whatever money is still owed.
What if you have a larger debt?
If your debt is so substantial that you don’t think you’ll be able to pay it off within the 0% period then consider a long-term rate card instead.
Low rate balance transfer cards provide a fixed rate – meaning you have an extended period without concerns over slipping on to a higher typical rate or switching cards at the end of an introductory offer. Instead you have a fixed interest rate to pay helping you budget each month.
The leading rate is available from the Barclaycard Simplicity Card, which offers 6.8% on balance transfers until repaid with no balance transfer fee.
However, if you would prefer to avoid a balance transfer fee, then the Capital One Fixed Rate Card could be the best option. It offers a fixed rate of 8.5% until August 1, 2012 but with no balance transfer fee.
To compare more leading rates visit our credit cards section.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.