How to make money transfer credit cards work for you

By Emma Lunn

If your overdrawn bank account is bleeding overdraft fees, getting out of the red as quickly as possible is the best move. And your credit card may be able to come to the rescue -- if it has money transfer capabilities.

Generally offered as an extra perk on some balance transfer cards, credit card money transfers allow you to move money from your credit card to a bank account. Yet, while money transfer credit cards can give you a quick infusion of much-needed cash, they can catch you in a cycle of debt if you aren't careful.

How do credit card money transfers work?
For most credit cards, the only way to access cash from your credit card is to get a cash advance by withdrawing money from an ATM. Yet cash advances often come with both high fees and high interest rates. money-transfer-credit-card

Money transfers, meanwhile, allow you to move money directly to a bank account. The amount you move is added to your credit card balance, and you can pay it off just like any other credit card debt. Because the money transfer credit cards currently on offer come with 0% introductory periods, you don't have to pay any interest on the amount you transfer if you pay off the balance within the 0% interest-free period.

Where can I find a money transfer credit card?
MBNA is the only credit card provider (Lloyds withdrew its product in May 2011) to offer money transfers -- but it provides cards for a number of companies. Credit cards that include a money transfer option include the MBNA Platinum card, Manchester United card, Arsenal card, Chelsea card and cards.

Another option is the new MBNA-backed Fluid Card from financial services company Media Ingenuity. Fluid offers a 15-month, interest-free period on both balance transfers and money transfers.

"This is a great card for people who are looking to get control of their finances and repay existing balances within the 15-month offer period," said Will Becker, chief executive of Media Ingenuity, in a statement.

Are money transfers a good way to borrow?
If used responsibly, money transfers can be a good way to shuffle around debt.

Say, for example, that you're paying interest on an overdraft for your savings account. By making a money transfer with your card, you can wipe out the overdraft on your account and pay for it interest-free on your credit card. If your account balance is low when your bills come due, you might also consider a pre-emptive money transfer to avoid getting hit with overdraft fees.

Are there any downsides?
Most money transfer credit cards currently on offer come with transfer fees -- 4% for the Fluid Card. So if you transfer £1,000 from the card to your bank account, you'll pay £40.

The fee means you'll have to do the sums to work out if a money transfer would save you money. If you'd be paying more in transfer fees than you would in interest on your overdraft, or fees for a missed direct debit, a money transfer would not be cost-effective.

"Customers need to weigh up the total cost of the money transfer deal including the fee and also be certain that they can completely repay the credit card debt within the 0% interest period," says Kevin Bray, insight analyst for banking at financial research company Defaqto. "Otherwise any financial gains could be lost."

Borrowers should also note that the advertised 15-month 0% period does not mean that you can make as many free balance transfers as you want for 15 months. The Fluid Card requires that any transfer be made within 60 days of opening the account -- the 15 months refers to the amount of time you have to pay off those transfers interest-free.

How to make smart money transfers
The same rule applies to money transfers as should be applied to balance transfers: Make sure you can repay the debt before the interest-free period ends -- after that, the interest rate on any remaining balance will jump significantly.

If you use a money transfer card to pay off other debts, such as an overdraft, you'll need to be disciplined.

"Money transfers should be used with caution as there is also the temptation to use the money transfer as cash which could easily be spent," Bray says. "And then customers will be left with their overdraft and a credit card debt to repay."

After making a money transfer, you will need to make at least the minimum payments required by your credit card provider. If you miss a payment you're likely to get hit with a late payment fee, and you may lose the 0% introductory offer.

Another thing to watch out for is the go-to rate when the 0% deal on money transfers expires. This is likely to be higher than the purchase interest rate on the credit card -- and could be even higher than the rate you were paying on your overdraft.

See related: The 5 biggest balance transfer mistakes, Is the Asda cash-back card a good deal?

Published: 14 August 2012