Be a zero hero. Grab a credit card deal

Lenders are falling over themselves to offer 0 per cent interest on balance transfers, but how can you make the most of it, asks Chiara Cavaglieri

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The Independent Online

Lenders are scrambling to reach the top of the best buy tables by offering some of the most generous deals on balance transfer credit cards ever seen. The competition has been heating up for some time and interest-free periods have been steadily increasing, but what should you do to make the most of this 0 per cent bonanza?

"Many people have focused on what's happened in the savings and mortgage markets in the four years since base rate was cut to 0.5 per cent, but it's interesting to see how the 0 per cent balance transfer market has changed in that time," says Andrew Hagger of uk.

"In March 2009, there were 52 zero per cent balance transfer offers with the average term at 9.6 months, today there are 71 interest-free cards with the average 0 per cent term now at 14.2 months."

MBNA last week launched its Platinum credit card offering up to two years of interest-free borrowing, marking the firm's longest ever balance transfer offer. The card is available exclusively on the MBNA website and also offers interest-free purchases for three months, although it does come with a hefty handling fee of 3.2 per cent, while another MBNA balance transfer card offers 22 months interest free with a lower 2 per cent fee.

The longest 0 per cent deal on the market is from Barclaycard, with a colossal term of 25 months and a one-off fee of 2.9 per cent (although they initially take 3.5 per cent before crediting your card with the 0.6 per cent difference within 28 days).

Barclaycard and MBNA have been battling it out much to borrowers' benefit, dragging the rest of the market with them so there are now a total of 19 credit cards offering interest-free terms of 20 months or longer.

"The Funding for Lending scheme has allowed lenders to focus on lending more, so we are seeing improved offers across mortgages, credit cards and personal loans," says Kevin Mountford from "For borrowers this is great news as it means people can take advantage of low-cost credit over a longer period."

If you want to get the best out of this increased competition, don't simply plump for the longest possible term though – you may want to repay the balance before the interest-free period expires, or switch the debt again, so the handling fee is one of the most important features if you want to keep costs to a minimum.

You could save a considerable sum, particularly if you are switching a large amount of debt. For example, the MBNA Platinum card at 24 months on 0 per cent would cost £160 on £5,000 and £256 on £8,000 of debt (charging 3.2 per cent), but you would pay only £75 and £120 respectively with the Lloyds TSB Platinum card which offers 21 months interest-free with a 1.5 per cent fee.

Depending on your priorities, you can use generous introductory offers to both cut borrowing costs (by avoiding paying any interest) and even get a return on your money in the meantime.

"Either pay off the balance in full at the end of the term and keep your money in a high interest savings account in the meantime, or repay in equal instalments – on a £6,000 debt repaying £240 over 25 months on a Barclaycard would clear the balance during the promotional period," says Mr Mountford.

But beware of some of the common pitfalls. Interest-free periods do not mean you can simply move your debt and forget about it. If you don't keep up at least the minimum repayments, your card provider could remove the introductory offer and lumber you with an expensive rate instead.

Ideally, aim to clear your debt each month. If you pay only the minimum repayment each month, while you do cover the interest you aren't dealing with the debt in an efficient way. In fact, this will ensure your debt lasts as long as possible because your repayments will decrease each month as your balance falls, whereas if your payments were fixed at a level as high as you could afford, you would clear the debt as quickly and cheaply as possible.

If you fail to clear or switch the debt before the low rate ends, the interest rate rockets, sometimes to as much as 20 per cent APR.

Bear in mind that you cannot transfer existing credit card debt from other cards within the same group. Also, although you are able to make purchases and withdraw cash from an ATM all on the one credit card, it is rarely a good idea to do so. After rule changes in 2011, banks have to focus repayments on the expensive debts first, but it can still be costly and is usually better to use a separate card for spending.

Check your credit rating to see which products you are likely to be accepted for. Every credit card requires you to pass a credit score, so if you haven't got a pristine record don't bother applying for the best cards.

"With the average card rate pushing 18.5 per cent APR for new borrowers, serious money can be saved if you're disciplined enough to manage your interest-free borrowing carefully," says Mr Hagger.

It may also be worth speaking to your existing card provider for any special deals.

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