The most important of my ‘cheap credit cards’ mantras is due to be turned upside down by the end of this year. I remember back in 2000 saying for the first time…
“Never, ever, ever, ever spend on a card you’ve done a cheap balance transfer on”
I said and wrote it so many times people would quote it back to me and it’s become a stalwart of the 0% balance transfers guide. If someone who does what I do can have a catch phrase “never, ever, ever, ever” is probably it, yet that’s will be changing (warning: though until noted its still very important to follow it – the change hasn’t come in yet)
In fact as I’ll explain later it’s not just going to be a problem, it could be as much as “if you need to spend – DO it on a balance transfer card”.
Why it’s always been ‘never spend on a BT card‘
This is all about repayment hierarchies, a nasty piece of commercial genius has allowed plastic providers to unfairly delve into their customers pockets for years.
They deliberately structure costs on cards so you pay different interest for different amounts e.g.
- Intro Balance Transfer Deal: 0%
- Spending on the card: 17.9%
- Cash withdrawals: 26.9%
Then if you use the card for more than one transaction type, all your repayments are biased towards repaying the cheap debt first, effectively trapping in the costly debt so it speedily accrues interest and you can’t touch it until all the cheap debt’s repaid.
The financial difference this makes is huge – here’s an example from the MSE credit card enquiry submission.
“Spend £2,000 at 15% on a card you’ve already shifted £2,000 to at 0%-for-16-months plus a 3% fee and with £200-a-month repayments the interest by the time it’s clear is £480.
Yet instead spend on a separate card, at the same 15% rate, and you can focus your repayments at clearing this costlier debt first. Do that and the total interest almost halves to £280. In fact, even using a card at a higher 20% interest rate for spending still leaves a substantial saving.”
By the end of the year it’s all change… how should you behave?
This practice is being banned, the government’s threat of legislation has pushed card companies into agreeing that by the end of this year repayment hierarchies must be positive (see credit card crackdown MSE news).
And that means there will no longer be an issue spending if you’ve done a balance transfer. However actually it could go further than that for some, the new rule will be…
“If you need to spend on a credit card, do it on the card you’ve balanced transfer on”
Now before I explain this, just in case of doubt – obviously the best thing to do is not borrow if you can avoid it (see the is it worth getting a card section of the 0% cards guide). Yet so I can run through the theory let’s assume someone both has a balance transfer card and needs new borrowing and has planned and budgeted etc.
- Step 1: Get the cheapest debt for each function.
Even with positive repayment hierarchy, you’re still best off ensuring you get the best deal for each transaction type – so that could mean a separate balance transfer card and cheap card for spending.
If you’re wondering ‘what about for cash withdrawals?’, the answers simple: never, ever, ever, ever, withdraw cash on a credit card (yay – the catch phrase lives) as you’ll pay interest even if you pay off in full and the rates are hideous.
- Step 2: If you can’t get special rates for both then spend on the balance transfer card.
This gets a bit complex, an example should help:
– You’ve had £2,000 debt on a Barstools card at 17.9% APR
– You just balance transferred it to a NickWorst card at 0% balance transfer + 3% fee
Now you need to borrow £1,000 more and can either do it on the Barstools card at 17.9% or NickWorst which is 18.9% for spending.
The natural assumption is to do it on Barstools because it’s a lower interest rate – but it may be you’re better off on the NickWorst card.
Why? Well you should always repay as much as you can off the most costly debt first, yet if you’d used both cards, then the rules mean you’d still need to pay the minimum repayment on the 0% debt – which would leave some of your cash going where you don’t want it too.
However if you have the costly debts from spending and the 0% balance transfer on the same card then the new ‘positive hierarchy’ rules mean more of your cash will be clearing the most costly debts – so it’ll go quickly and this will more than make up for the slightly higher interest rate.
Now this new ‘always spend on a balance transfer card’ rule does have a few wobbles, we don’t know yet if it’ll work, so this is still a ‘thought piece’ not a definitive rule just yet. Possible stumbling blocks include…
- Whether all the repayment is positive hierarchy or some can go to repaying interest/ fees/ a certain level of repayment on each debt.
- The actual rate difference you’re charged on spending makes a big difference. If the Barstools card had let you spend at 10% and he NickWorst at 20% then this wouldn’t work.
- Some will benefit from the simple discipline of having separate cards for each transaction type – to allow them to better budget.
Yet whatever happens it is going to fundamentally change the best practice rules for borrowing on cards. Of course this is fairly niche and nerdy, but I’d love your thoughts…