When Balance Transfers Backfire!

Have you played the 0% credit-card game yet? If not, why not?

To join in, you need to have just one thing: an existing balance on a store or credit card. Since two-thirds of adults have at least one credit card, millions of people who have yet to play the 0% game are free to take part anytime.

What's more, playing the interest-free game is a popular activity. According to a new report from M&S Money (now part of HSBC), over half (51%) of all credit cardholders have transferred a balance from one piece of plastic to another in order to take advantage of interest-free or low-rate deals.

M&S Money reckons that the average transfer exceeds £2,750, but that almost £2,100 is still owed at the end of any introductory interest-free period. In other words, only a quarter (25%) of the transferred debt is repaid during this break. What's more, only just over a third (36%) of borrowers manages to repay their entire debt during low- or no-interest periods.

So, unless a borrower shifts this debt onto another 0% deal, s/he may be forced to pay standard rates of interest. Indeed, M&S Money estimates that almost two-thirds (64%) of cardholders with transferred debts revert to their credit card's higher interest rate and never transfer their debts again. Given that a typical credit card charges a rate of around 16% APR, this is an expensive mistake!

So, if you're going to play the 0% game, don't just play one round and then retire hurt. If you do, you'll end up enjoying just one interest-free break, instead of a string of consecutive 0% deals. Furthermore, if you lack the financial discipline (or a strong enough credit record) to keep moving your debts every six to twelve months, then you may be better off opting for a long-term, ultra-low transfer rate.

With a lifetime balance transfer, you transfer your store- and credit-card balances to a card which charges a low rate until these balances have been repaid in full. Given that interest rates on Best Buy lifetime balance transfers can be as little as 3.9% APR, it's possible to slash your interest bill by three-quarters with a single transfer. Eureka!

For the record, the &MORE credit card from M&S Money charges a lifetime rate of 3.9% a year on transfers made in the first six months with no transfer fee, plus 0% on purchases for a year, making it the winner in this category. You'll find five other great lifetime balance transfer cards in the Fool's credit card centre.

While writing this article, I heard that the Bank of England raised its base rate again, this time to 5.25% a year. With the cost of borrowing on the rise, it makes even more sense to take full advantage of interest-free and low-rate credit deals!