0% balance transfer credit card or loan – which is best?

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If you have some credit card debt to pay off, you might be looking for a 0% balance transfer credit card deal. But would you be better off taking out a loan instead? Here are the pros and cons.

0% balance transfer credit card

0% balance transfer credit cards might seem like the best option if you want to pay off your existing credit card debt. But there are some things to bear in mind:

  • 0% balance transfer credit card deals aren’t generally free. Although the credit card company won’t charge you interest, you’ll normally pay a balance transfer fee. This can be anything from 0.5% to 3% of the amount you transfer.

SAVVY TIP: As I write this, there are some 0% balance transfer credit card deals that don’t charge a fee. However, they’re not offered all the time.

  • You might not qualify for the longest balance transfer period. Some credit card companies offer 0% balance transfer deals of three years or more. But you have to have the best credit rating to get them. If you don’t have such a good credit rating, you may get a much shorter period to pay off your credit card.
  • You may be tempted to spend more money. Some balance transfer credit cards also come with a 0% interest period on purchases, so you may be tempted to use your credit card for spending. But that could mean you end up paying a lot in interest or spending money you can’t afford.
  • If you pay the minimum, you won’t have paid off your credit card balance by the time the deal runs out. Credit cards generally only specify the minimum amount you have to pay off in order to maintain the contract. But if you only pay the minimum, you won’t have cleared your debt by the time the 0% balance transfer deal runs out.

What are the cheapest deals?

0% balance transfer deals change frequently, but as I write this, HSBC has a 32 month 0% balance transfer deal (there’s a fee of 1.4% plus £25 cashback) and M&S Bank has a 28 month 0% balance transfer deal charging 0.99% and £5 of M&S points to spend. Check websites such as MoneySavingExpert and Moneyfacts to compare the deals.

Low rate personal loans

Although you won’t get an interest-free personal loan, you may be able to get a loan that charges less than 3% interest. For some people, taking out a loan may be a better option than using a 0% balance transfer credit card deal.  Here are some pros and cons:

  • You’ll pay off the loan at the end of the term. As long as you keep up the payments, you’ll know you will have cleared the loan at the end of the loan period.
  • You make a fixed payment every month. You’ll know exactly how much you have to find.
  • You can overpay on your loan to clear it faster. Although loans are designed to be paid off over the fixed term, the rules allow you to pay your loan off faster, and you’ll only pay a small penalty. In fact, you’re allowed to pay off up to £8,000 extra every year. The most you’ll be charged by way of a penalty is 1% of the extra amount you’re paying off. Find out more in the article called Paying off your loan early.
  • Loans aren’t interest free. Interest rates on loans vary from less than 3% to over 15%. Generally, supermarket banks and non-traditional banks charge the least, and high street banks charge more.
  • You may not get the interest rate that’s advertised. Only 51% of those who’ve successfully applied for a loan have to be offered what’s called the representative APR – this is the interest rate, plus any fees you have to pay. Depending on your credit rating, you may be offered a loan at a higher interest rate.
  • The lower the amount you want to borrow, the higher the interest rate. Most personal loan providers charge tiered interest rates. You’ll often pay the lowest interest rate if you want to borrow at least £10,000 (this level varies between providers). So if you only want to pay off a few thousand pounds, you may end up paying quite a high interest rate.

0% credit card and personal loan costs compared

I’ve looked at a couple of examples to see which is the cheapest and how much more you’d pay by choosing the other option. In broad terms, the lower the amount you want to pay off, the better value a 0% balance transfer credit card is. If you want to pay off over £7,500, a personal loan may be a better option if you think you may not be disciplined enough to pay off a balance transfer credit card. Here are some worked examples:

  • If you wanted to transfer a balance of £3,000 to a 0% credit card, charging a fee of 2%, you would owe £3060 at the outset. If you wanted to repay this over 30 months, your monthly payments would be approximately £102.
  • If you wanted to take out a personal loan of £3,000 over 30 months you may be charged between 11% and 12.5% interest. These are typical rates, but there’s no guarantee you’d get that rate. If so, your monthly payments would be around £115 and you’d repay approximately £3,500.
  • If you wanted to transfer a balance of £10,000 to a 0% credit card, charging a fee of 2%, you’d owe £10,200 at the outset.  If you wanted to repay it over 30 months, your monthly payments would be approximately £342.
  • If you wanted to take out a personal loan of £10,000 over 30 months you may be charged as little as 3% interest. In this case, your monthly payments would be around £346 and you’d repay approximately £10,386.

Related articles:

How to transfer your credit card balance

Using a spending diary

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