When paying for 0% beats a no fee balance transfer

No fee balance transfers and 0% introductory offers both promise, on first glance at least, a way to reduce high-interest credit balances for nothing.

Neither deliver on that promise - whichever way you cut it, there is some outlay for moving a credit card balance - but they fail to deliver in slightly different ways.

Here are three scenarios where the upfront cost of a 0% deal, up to 3% of the transferred balance, can still beat fee-free balance transfer offers.

1. When you'll take a long time to repay

No-fee balance transfer credit cards are generally cheaper than making that initial upfront cost for a 0% deal, even when the interest rate is fairly high in low-rate 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)

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)

Halve the amount you pay back every month and you swiftly find that the amount you save by not paying an initial fee for moving the balance is outweighed by the amount you'll eventually pay out in interest.

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

2. When you'll repay in the 0% period

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 and when you're trying to pay off within a 0% period they can get even more so.

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

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

If the interest rate was 19% p.a. and you made a £200 payment every month from the end of the 0% deal on you'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 could potentially have done the job for much less.

3. When budgeting will help you pay off the debt

Finally, there's a psychological reason for choosing an upfront fee and a limited period 0% balance transfer deal over no fee and a low interest rate.

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

They do much more than suck more than 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 you try to get on with other problems, than to take the extra budgeting time to ensure that it gets paid off in full.

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 you're worried about your debts, a much-needed one.

Some people call this a 'debt snowball': paying off one commitment in full, even if it's just small, makes it easier to deal with the next one.

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:

• Stick with 0% and be a credit card tart: This advice is seriously out of date. In the current tough credit environment, only those with the very best credit histories can be certain enough that they'll be accepted to another 0% credit card to take this risk with their finances.
• A 0% deal will force you to budget: budgets should be sensible, even conservative, guesses as to how much you'll be able to spend on repaying your debts.
  
  Taking an extreme approach that you're bound to find the money to pay it back within the 0% period somehow is a recipe for disaster.
• 'I'll be fine as long as I can get the top 0% deal': not everyone will be eligible for the market-leading 0% balance transfer period. Check application criteria carefully before you base your assumptions on the pickiest providers in the credit card market.

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