How to take advantage of the balance transfer war

By Emma Lunn

The past month has seen credit card providers go to war in the balance transfer market.

MBNA kicked things off by offering 24 months interest free on its Platinum credit card. This was soon overtaken by Tesco introducing a new 25-month deal for 0% balance transfers on its Clubcard Credit Card. Not to be outdone, Barclaycard went one step further with a massive 26-month deal at 0% on its Platinum Balance Transfer card -- which is currently the longest on the market.

Just three years ago, in 2010, the longest 0% period on offer was 16 months. The market has become more and more competitive over the past few years as credit card providers try to pull in new business. balance-transfer-war

"The reason behind these moves isn't anything to do with a desire to offer the customer a more attractive deal, it's driven more by a marketing strategy to appear at the top of the best buy tables and get the volume of business that this delivers," says Andrew Hagger, personal finance commentator at MoneyComms.

Whether credit card issuers' motives are consumer friendly or not, it's possible for consumers to take advantage of the stiff competition. Here's how:

1. Don't get blinded by the massive 0% period. Look carefully at the card's terms and take into consideration how you plan to use the card. Although some 0% balance transfer deals also offer 0% on purchases, this will be for a much shorter time period.

For example, Barclaycard's 26-month, 0% offer on its Platinum Balance Transfer card is impressive, but remember that this applies only to the amount you transfer. It's also offering six months interest free on purchases, with purchases then rising to a rate of 18.9%. So if you make any purchases on the card after six months, Barclaycard will start charging interest for any balances carried over. If you need to use a card for purchases rather than just transferring higher-interest card debt to a zero-interest product, look for a card that offers 0% on purchases for a longer period of time and then have separate cards for transferred debts.

2. Have a plan. Don't sign up for a balance transfer card if you don't have a plan for paying off the debt. A long balance transfer period of more than two years may lull you into complacency, leaving you paying off the transferred debt at a higher rate after the promotional period comes to an end -- or forcing you to hop to another balance transfer card.

3. Do the sums. Watching card issuers compete for the longest 0% period and then selecting the winner may not be the best strategy. Before switching an existing balance to a new credit card, work out how much it will cost you. Cards with the longest 0% periods generally require a balance transfer fee, expressed as a percentage of the amount transferred.

Looking at the best buys mentioned above, Barclaycard charges a balance transfer fee of 3.5%, MBNA charges 3.2%, and Tesco charges 2.9%. So transferring a £3,000 balance would cost you £105 with Barclaycard, £96 with MBNA and £87 with Tesco.

Yet the balance transfer fee isn't the only factor to take into account -- a longer 0% period has appeal because it can lower your monthly payments, leaving you with extra money each month. So which card will save you the most?

Let's compare each of these three ultra-long balance transfer offers to a card charging the industry average of about 18% (assuming a £3,000 balance). The chart below shows the costs associated with each card, as well as the savings possible with the three longest 0% deals on the market.

Balance transfer cards v. regular card charging 18% (assumed balance of £3,000)
 
Barclaycard (26 months)
 MBNA (24 months)
Tesco (25  months)
Regular card monthly payment necessary to clear debt £141 £150 £145
Balance transfer card monthly payment necessary to clear debt £116 £136 £120
Regular card interest costs
£646 £595 £620
Balance transfer card transfer fee
£105 £96 £87
Monthly savings with balance transfer £25 £14 £25
Total savings with balance transfer £541 £499 £533
Source: UK.CreditCards.com survey of longest balance transfer deals on the market. All terms, conditions and interest rates are subject to change by issuer. Data in the chart are current as of 11 April 2013.

So, assuming you drag out your payments for the entirety of the 0% period, the difference in savings between the cards is minor. Barclaycard's offer comes out slightly ahead, both in overall savings and in monthly payments. However, no matter which card you choose, you'll lower your monthly payment and save at least about £500 by doing a lengthy balance transfer.

See related: 5 biggest balance transfer mistakes, A 0% card for damaged credit -- too good to be true?

Published: 12 April 2013