5 ways to avoid pitfalls of credit card money transfers

By Michael Lloyd

If you're looking to pay for an overdraft, loan or just some unusual expenses, a money transfer credit card may be your answer.

Money transfers are similar to credit card cash advances in some ways, and balance transfers in other ways. You borrow money against the card and then pay it off over time, and the cards often come with lengthy introductory offers in which you pay 0% interest -- some up to three years.

"A money transfer from a credit card is where money is sent to your current account and appears on your credit card balance, usually with a [transfer] fee," a spokesman from debt charity StepChange said in response to emailed questions. "They often come with an interest-free period, but this is for a limited time."money-transfer-card

Used wisely, money transfers can be a great way of accessing
cheap cash, but they can cause problems if managed poorly. With some preparation and planning, however, you can avoid those mistakes and
make a money transfer card work for you. Follow these six steps:

1. Know your options.
Before applying for a new money transfer card, find out if any of your existing lenders will allow you to do a money transfer at a low promotional rate.

You'll likely still pay a higher transfer fee than you would if you took out a new card, but you'll avoid any fresh applications on your credit file, which might be important if you're planning on applying for a new mortgage or taking out any other major loans soon.

You'll need a decent credit score to qualify for a new money transfer card, and you can use online eligibility checkers if you're worried about your credit-worthiness. MBNA and Barclaycard -- both of which offer long-term 0% money transfer deals -- provide free online eligibility checkers that will only leave a "soft" search on your credit file.

2. Check fees and interest charges.
Make sure you know exactly what you're going to pay for before agreeing to a money transfer. Some money transfer credit card issuers start charging interest immediately. Always look for a 0% interest offer, even if it's just for a few months.

If you're looking to transfer money from an existing card, make sure you get a good introductory rate; the lower, the better. It may be worth the hit on your credit to apply for a new card if your existing card issuers can't offer you a low transfer fee or interest rate.

With new cards, apply for the money transfer as soon as you're approved for the card to get the best rates. For instance, if you transfer money within the first 60 days of owning MBNA's Platinum card you'll pay a 1.89% handling fee and 0% interest for up to 24 months.

Transfer after 60 days and you'll pay a 5% handling fee and 22.9% interest right away.

3. Never miss a payment.
As with balance transfer cards, you could lose your promotional rate if you breach the terms of your credit agreement.

"[Your promotional money transfer rate] could be cancelled immediately if you miss a payment or exceed your credit limit, meaning the interest begins a lot earlier than you were expecting," the StepChange spokesman said.

Since these types of cards typically come with a high standard variable rate, having your promotional offer removed could see your monthly payment rocket. Some card issuers will be only too happy to pull your promotional rate and start hitting you with interest charges as soon as you misstep.

To prevent a missed payment, set up a direct debit to meet at least your minimum monthly instalments.

4. Avoid purchases.
Never make purchases on a money transfer card unless you know these are included in your interest-free offer, or unless you know you can pay off the balance in full when the bill is due. Any purchases you make will typically be charged at your card issuer's standard rate, which could be more than 20% on a money transfer card. While you'll still likely pay off the most expensive part of your debt first (the purchases), this will be a pricy way to borrow.

5. Clear what you owe before your deal expires.
When you get to the end of your interest-free period, you'll immediately be charged the card issuer's standard rate. If you only make minimum payments each month while on your promotional rate, you could be left with a large chunk of debt when it expires.

Before applying for a money transfer card, work out a strategy to clear your debt before the interest-free period ends. Your best bet is to divide the amount you've borrowed by the number of months your offer runs, and pay this sum -- or more -- each billing cycle.  

"Paying interest on large cash balances on your credit card can make it an expensive way to borrow money, especially if you're only making the minimum payment," the StepChange adviser said. "As with all credit, people need to look at how they will pay it back, how much it will cost them in the long run and what they will do if their income suddenly drops."

See related: Need a balance transfer? Check your wallet first, 4 tips for avoiding balance-transfer traps, Credit card cash advances: Use only in case of emergency

Published: 16 December 2015