There are some great credit card deals available offering interest-free periods on balance transfers and purchases. With an increasing number of households struggling to make ends meet each month because of rising living costs, such products can offer a financial lifeline. However, unless you understand exactly how these cards work, you may find yourself racking up interest that you weren’t expecting.
It is all down to the way card providers allocate your monthly repayments. If you use your credit card in a number of ways – say you’ve transferred a debt over from another card as well as using it for your weekly spending – most providers view those as separate balances and they apply a repayment system where the cheapest debt is cleared first.
For example, if you transferred a balance on to a credit card which offered a 0% interest-free period on balance transfers for 12-months, you would have a full year to clear that debt without having to pay interest.
However, if the same card also has a three-month interest-free offer on purchases, you may be tempted to spend on it as well during those first few months. However, if you do this, as soon as that three-month offer expires, you will start accruing interest on the purchase balance unless you can afford to repay the entire debt (including the amount you transferred over from the other card).
This is because the payments you make each month will go towards repaying the balance transfer, leaving you accumulating interest on the purchases you made.
A vicious circle of mounting debts
Without the money to pay off the full balance of the card, you will be hit with interest charges. You’ll also be paying a high rate of interest too – usually in the region of 15.9%. Indeed, Moneysupermarket has found that the typical customer will pay £250 in interest over the duration of the balance transfer period.
There are many providers that will allow you to fall into this trap. Egg, Abbey, Virgin, MBNA, Barclaycard, Tesco and Lloyds TSB are among those currently advertising lengthy balance transfer deals alongside short-term purchases offers.
In fact, there are only a handful of providers on the market that are well-suited to those who want to continue to make purchases while using a balance transfer card.
These are the Halifax One Online Special, which offers 0% on purchases and balance transfers for 10 months and the Capital One Platinum Card which also has a 0% purchase and balance transfer period that run for the same length of time – in this case until May 1 2009.
The payment hierarchy trap doesn’t mean you should avoid cards which offer different interest-free periods – you just need to be savvy and make sure you only use the card for a single purpose. If needs be, have one card for spending and one for balance transfers.
Best cards for balance transfers
The Virgin credit card has an interest-free offer on balance transfers which lasts for 15 months. However, do not be tempted to spend on the card as well as purchases are only interest-free for the first three months after which you are charged interest at 15.9%. If you make a balance transfer, you will have to pay a 2.98% fee which is added to the balance.
Alternatively, Barclaycard, MBNA and Mint also have great balance transfer offers at the moment. The 0% deal on the Barclaycard Platinum lasts for 14 months, while that on MBNA’s Platinum card and the Mint credit card run until June 2009. All three deals levy a 2.9% balance transfer fee. The MBNA offer is an exclusive deal, available only through moneysupermarket.com.
Again, avoid spending on these cards as the interest-free periods on purchases are shorter than those for balance transfers.
Best cards for purchases
If you are looking for a credit card to spend on, Capital One’s Platinum card, mentioned above, has the longest interest-free period. You can of course, use this card for balance transfers as well.
Alternatively, HSBC’s credit card and the First Direct Gold card offer 12-month interest-free periods on purchases. However, neither have a 0% offer on balance transfers.
Next best for purchases is the Halifax One Online Special, mentioned above, which like the Capital One card, can also be used for transfers.
Remember too that these leading rates are only available to customers with good credit scores. For a realistic overview of the credit cards available to you, use Eligibility Checker which returns results based on your credit profile.
The key however, is to use separate credit cards for specific purposes. Use one to pay off your debts and another for spending – and if the money you owe is already high, steer clear of adding more weight to your mounting debt load.
Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.