Is it time to end the ‘always pay off your 0% balance transfer’ before it ends rule?
This does cause me a little bit of a consternation. We always used to say: "only choose a 0% balance transfer card if you’ll either repay it in full or shift it again before the 0% period ends", otherwise it’s safer to go for a long term ‘for life’ card. Yet now that simply isn’t true in many cases, even over an extended period.
Though I still do think it’s a useful conceptual message, the financial mathematics behind it don’t quite add up.
What’s changed?
Our rethink is a result of four things:
- 0% deals are getting longer. The longest is now 20 months 0%. In the past sixteen months was the longest-ever, but there are now many cards longer than that.
- Long term deals aren’t improving. At one point you could lock-in at 3.9% for life, fees free, if you shifted to the right card. Now the best deal is 5.9% with a 1.5%.
- One-off fees are now in place for both. Shift debt and there’s now almost always a fee, (even on long term cards which didn’t used to have them) which inhibits moving to an extent.
- We’ve built a new calculator. The which card’s cheapest? tool shows you which card is cheapest assuming fixed repayments and we were very surprised at some of the results.
The extent of the changes
Take an example based on the current longest 0% deal and the cheapest ‘rate for life’ long term card.
| Monthly repayment | Barclaycard: 0% for 20 months 3.2% fee (17.5% rep APR after) |
MBNA rate for life: 5.9% plus 1.5% fee |
|---|---|---|
| £100 | £1,110 interest repaid 62mths | £830 interest repaid 59 mths |
| £130 | £570 interest repaid 43 mths | £630 interest repaid 44 mths |
| £150 | £390 interest repaid 36 mths | £550 interest repaid 38 mths |
As can be seen from the table, (the tool shows far more iterations) even after 43 months the Barclaycard is still cheaper than the long term for life card (assuming consistent repayments and no spending on the card). So, for many people even if they don’t clear it in time, or don’t have a decent credit score for another card, it’s still the cheapest single transfer.
Why does it work this way?
The key is you clear so much debt in the early period when the debt is bigger and interest’s 0%, that the much higher APR afterwards doesn’t have as much of an impact.
Now, of course it would still be cheaper in the case above if, after the 20 months, you simply switch the debt again to another 0% card – that’s still the best option.
Though bizarrely there are now even a few extreme scenarios when it’s not cheaper to switch again. For example, if you only had a couple of months left to repay once the 0% has ended, the fee for switching would be bigger than the interest cost by the time the card is cleared.
