I recently received an email about a new balance transfer deal on an MBNA credit card – normally I’d delete this sort of email without much thought, but as this one was offering a 13-month 0% deal, I thought I’d check it out in more detail.
A little background on 0% balance transfers.
If you have a big balance on your credit card, 0% balance transfer deals can be a good option for you, as they can potentially save you money on the amount of interest you pay. Rather than the standard interest rate being applied to your balance (which is likely to be between 10%-20% APR), you just have to make the minimum payment on the card for the duration of the deal, and providing you don’t spend on the card or worse, take cash out using the card, the balance won’t have anything added to it during the deal period. These cards do take some will power to prevent yourself spending on them (which is a real no-no, thanks to credit card companies’ cunning “negative payment hierarchy”).
Credit card companies offer these deals to get new customers in the hope that when the deal finishes you’ll keep using them. In the past it was reasonably easy to be a “rate tart”, switching from one 0% balance card to the next whenever the deals ended, but these days this is not so simple. It’s because these deals are somewhat rarer that this one jumped out at me.
As is standard with these credit card deals, there’s also a handling fee – in this case it’s 2.9%, and this has to be factored in to the overall saving calculation, along with thinking about how much you can afford to pay, taking into account any minimum repayment amount that the credit card company may enforce.
Now onto the calculations. I’m not going to get you to calculate the saving manually – as you can see, with interest rates, minimum payments and transfer fees, there’s quite a lot to take into account. Thankfully, there’s already a balance transfer calculator available that will do this for you. Plug all of the details in to the calculator to check whether the deal you’ve been offered is worthwhile.
Here’s a couple of examples based on this particular card to show you the potential savings:
| Credit Card Balance: | £1,000 | £5,000 |
| Monthly payments: | £50 | £50 |
| Current APR: | 16.9% | 16.9% |
| Saving: | £101 | £722 |
| Balance remaining: | £379 | £4,495 |
As you can see, where these deals really come into their own are on large balances.
Although the savings are there to be had, paying just £50 per month off a £5,000 balance is pretty poor, and would take you a long, long time to pay off the credit card in full (there’s a calculator for that, too, unsuprisingly). In the table, you can see how much is left to pay on the card once the 0% deal finishes – still some way to go, so they’re not the answer to all of your problems if you do have a large balance. By “snowflaking” as much money as possible to the card whilst you have a 0% deal you can cut the amount of interest you pay, along with the time it will take to clear the balance.
In summary, 0% balance transfer deals (along with low interest “life of balance” credit card deals) do have their place, and if used carefully can save you money. But they do require some thought and will power, and the ultimate aim should be to not get a large credit card balance in the first place.
