How to be a Card Tart
This week I received an email from Barclaycard offering me a balance transfer from another credit or store card for 0% interest and a 4.4% transfer fee fixed until June 2020. This is one of the best deals I have seen recently, obviously the 0% interest is offset by the 4.4% fee, but still 4.4% interest to borrow money for 3 years looks good. In fact using credit cards as a cheap source of credit can be an excellent way to finance projects or investments if you are careful and well disciplined.
I have been what is sometimes referred to as a card tart meaning a customer that continually moves debts from one card to another while paying very low rates of interest. In recent years this has become harder as card companies take their interest in the form of balance transfer fees. Still if you have a good credit rating your card company will periodically send you these offers to tempt you into borrowing from them in the hope that when the initial low rate expires you will be left with a debt that they can charge a higher interest rate on.
There are a few areas you need to be aware of before you do this:
The Low Fee
The fee is charged at the beginning of the loan which means the equivalent interest rate isn’t as simple to calculate as it sounds. In the above deal with Barclaycard the 4.4% fee spread over 3 years might seem like an annual equivalent rate of 1.46%, that is 4.4% divided by 3 years. Unfortunately it isn’t quite that simple and requires a spreadsheet to work out the true interest. With all credit cards a minimum monthly payment is required which is usually 2-3% of the outstanding balance. If there was no minimum payment and you could not pay anything back until the June 2020 statement then the AER would indeed be 1.46%. However with a minimum payment of 2% each month and then settling the remaining balance on the June 2020 statement your AER rises to 1.8%. Similarly with a 3% minimum payment and full settlement at the end of the period your AER rises to 2.0%. Splitting hairs maybe but it’s worth watching out for this. Still a 1.8%-2.0% AER on a 3 year loan is excellent in anyone’s book.
Minimum Payment
Ideally you should aim to only pay the minimum payment each month until the offer expires. The reason being is that you have paid the interest already as the upfront transfer fee, the loan is now effectively interest free. If you ever get an interest free loan pay it back as slowly as you can as you can always earn interest on the money elsewhere. For budgeting purposes you might decide to spread your repayments evenly. For example on a £1,000 loan paying back £348 each year (3 years at £348=£1,044 which is the original £1,000 plus £44 (4.4%) transfer fee) which would raise your AER to 2.2%. Some people would consider this extra 0.2% worth it for the piece of mind of having a budgeting plan in place to fully settle the debt on expiry. If you are well disciplined then using the minimum payment method with a balloon payment at the end can be the best strategy. But you MUST always pay it off on expiry, you never want to revert back to the standard rate which can be 15-20% or more. Also don’t hope that another card offer will come along that you can transfer to at the end of the period, they don’t always and it’s better to have an exit strategy in place. Also don’t think that paying it off early is virtuous. As you have paid the interest already it’s better to hold on to the debt until the end. For example starting with a £1,000 loan you decide to pay down £750 in the first year, £200 in the second year and the final £94 in year 3 (total repayment £1,044 as above) then your AER leaps to 3.2%. Admittedly not massive but you have increased the effective rate you are paying to the bank. Similarly paying it off too early will affect the AER, a month or two won’t make much difference but paying it all back after a year (>4.4% AER) or six months (>9% AER) is giving the bank free money.
Using Your Card
With these types of transfer you cannot (unless you were very foolish) use the card for purchases or other offers. The way the repayments on the card are rigged means that the lowest interest items are repaid first. So for example if you did your weekly shopping on the same card then the purchased items would sit at the bottom of the pile earning the standard rate while your repayments each month would only be reducing the debt of the low interest balance transfer. The effectively have to put your card in a drawer and forget about it until the balance is settled, for this reason having more than one credit card is often a good idea.
Final Thoughts
I think the main thing I would add would be that paying the minimum payment each month is not particularly good for improving your credit score. Maybe aim to pay the minimum + x amount each month just to trick the credit agencies.
You need to have financial discipline to successfully use this method. Never let a balance revert to standard rate and always have an exit strategy when the offer expires. It probably a good idea to have 2 or 3 cards to play off each other but don’t rely on there being a new offer when your current deal ends. I think having more than one card, if used conservatively, is beneficial to your credit score in the long run.
Thanks once again for reading and feel free to add any comments or suggestions.
