When paying for 0% beats a no fee balance transfer

0% no fee balance transfer

On first glance, no fee 'life of balance' transfers and 0% introductory transfers both promise to reduce high interest rates for nothing.

Neither deliver on that promise - whichever way you cut it, there is some outlay for moving a credit card balance - but no fee deals are becoming more popular.

Here are three scenarios where the upfront cost of a 0% deal, which more detail here, is usually up to 3% of the transferred balance, can still beat fee free balance transfer offers.

1. When it takes a long time to repay

As long as the debt is paid off in the 0% period, that initial upfront cost beats a no fee deal over a longer period, even when the interest rate is fairly high in low rate credit card terms.

So, for example, let's look at the total cost (that is, either the initial balance transfer fee or monthly interest payments) when a £3,000 credit card balance takes around six months to pay off in full.

£3,000 balance, paying £600 a month (6 months to repay)

Interest and fees 6.95% p.a.
No fee
7.9% p.a.
No fee
0%
2% fee
9.94% p.a.
No fee
0%
2.5% fee
0%
3% fee
Total cost £52 £59 £60 £74 £75 £90

It's a different story when it comes to taking double that amount of time to pay off the same debt.

£3,000 balance, paying £300 a month (11 months to repay)

Interest & fee 0%
2% fee
0%
2.5% fee
0%
3% fee
6.95% p.a.
No fee
7.9% p.a.
No fee
9.94% p.a.
No fee
Total cost £60 £75 £90 £97 £111 £139

Halve the amount paid back every month and it'll quickly become clear that the amount saved by not paying an initial fee for moving the balance is outweighed by the amount that will eventually be paid out in interest.

For this reason, budgeting for a balance transfer is vital, see point three for more on that.

2. When the balance is repaid within the 0% period

As we noted, the examples above expect the best from a 0% balance transfer deal: they anticipate that the cardholder will take the deal, move their balance and then pay it off in full within that 0% period, meaning that their only outgoing has been that initial fee.

Unfortunately, that's not always the case.

Even with the best of intentions, life has a way of intervening in budgeting plans. Some of those interventions can be pretty expensive, especially for those trying to pay off within a 0% period.

Let's say there's a 0% balance transfer credit card: the cardholder moves £5,000 to the introductory rate but, ultimately they're only able to make minimum repayments on the debt most of the time and, at the end of the 0% deal, they've still got a £4,000 debt.

Now they're landed with an interest rate that might be even higher than the one they moved from.

If the interest rate was 19% p.a. and the cardholder made a £200 payment every month from the end of the 0% deal on they'd pay £762 in interest for a year and 11 months to get it paid off in full.

A life of balance transfer credit card without a fee, like these, could have done the job for much less.

3. Taking motivation into account

Finally, it's becoming increasingly clear that, when considering how to get out of debt, psychological reasoning counts.

It's no secret that debts can be a major strain on our lives.

They do much more than suck money from our pay packets, they suck our will to deal with our finances at all.

It often becomes more preferable to ignore a credit card debt, or leave it languishing at a low interest rate while the cardholder tries to get on with other problems, than to take the extra budgeting time to ensure that it gets paid off in full.

That could be one reason for choosing an upfront fee and a limited period 0% balance transfer deal over no fee and a low interest rate.

This is not, let us be very clear, an elaborate way of saying that no fee, low interest rate deals are lazy, we just mean that having a set goal in mind - the end of that 0% period at which point the debt will be done and dusted - can be a mental boost and, if for people that are worried about their debts, a much needed one.

Multiple debts

Advocates of debt psychology also have a lot to say about those with a number of unsecured debts to deal with.

The 'debt snowball' method - paying off one commitment in full, even if it's just small, to make it easier to deal with the next one - is now practically mainstream and increasingly supported by evidence, despite the fact that it costs more than the conventional 'highest interest rate first' method of paying down.

We have more practical information on the snowball method, including an Excel sheet, here.

Bad reasons for going for a 0% balance transfer

Having said all that, there are some very bad reasons floating around for going for a 0% deal over a no fee balance transfer.

Don't get caught out by some of the dodgy reasoning of the following:

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