Money transfers: Another way to pay 0% on debt

Borrowing more money to pay off existing debt might sound a little irresponsible, but credit cards come armed with a number of benefits.

09:16 16 May 2013

Paying off an expensive overdraft or loan can sometimes feel like an impossible task. But, believe it or not, a credit card could help you achieve your goal.

 

Borrowing more money to pay off existing debt might sound a little irresponsible, but credit cards come armed with a number of benefits. And perhaps one of the lesser-known of these is a money transfer.

 

What is a money transfer?

 

Cards which offer money transfers allow you to move available credit from your credit card straight into your current account. You can then use the funds to pay off your overdraft or loan - or theoretically, for anything you want.

Providing you use the card sensibly and opt for one that offers an interest-free or low rate money transfer deal, this little trick can help you to clear your debt more quickly and save you a lot in interest.

 

The best deals

 

A money transfer facility on a credit card is fairly uncommon, so don't fall into the trap of just opting for the first one you see. Instead, as ever, shop around for the best deals.

The longest interest-free money transfer deal available right now comes from the Fluid Balance Transfer Card(issued by MBNA). The card offers 24 months interest-free on both balance transfers and money transfers, providing you carry out the transfer within 60 days of opening your account.

This means that if you had an overdraft of £2,500, you could transfer £2,500 across from your credit card (if your agreed credit limit permits) into your current account, pay off this debt and avoid paying interest on your debt for two years.

An alternative is the MBNA Everyday Credit Card which offers 0% on balance transfers and money transfers for 18 months. Again, to qualify for this, you must carry out the transfer within 60 days of opening the account.
 
Is there a catch?

 

Unfortunately, as with most things in life, there are a few catches.

For a start, you will have to pay a transfer fee. Both the Fluid Balance Transfer card and the MBNA Everyday card charge a fee of 4% of the amount transferred. So if you're transferring £2,500, this works out to be £100.

However, if you don't carry out the transfer within 60 days, the fee goes up to 5% (£125 on a debt of £2,500.) On top of this, you'll lose out on the 0% deal and be forced to pay a much higher representative annual percentage rate (APR) of 20.9% (variable). Given most overdraft rates are cheaper than this, it's vital that you move your money within the 60-day window.

Once you've completed your money transfer, make a real effort to clear your debt in full before the interest-free window ends, otherwise you'll be charged an APR of 20.9%.

If you don't think you'll manage to do this, you might be better off applying for the AA Transfer Plus Credit Card(also issued by MBNA). The AA card offers a low APR of 6.9% for the life of the debt providing the transfer is carried out within 60 days of opening the account. In other words, you'll pay a rate of 6.9% until you've cleared your balance - whenever that might be.

The other advantage of the AA Transfer Plus card is that the transfer fee is much lower at 2%. So if you're transferring £2,500, this works out to be £62.50.

However, you should also be aware that if you already have an MBNA credit card, you won't be able to apply for any of the above cards as they are all issued by MBNA.

 

Is a money transfer right for me?

 

If you're struggling to pay off an overdraft or a loan, a money transfer could be the key to getting rid of that debt for good. Providing you are able to meet the cost of the transfer fee and carry out the transfer within the 60 days, money transfers offer an easy, and often cheaper, way of clearing your debt.

If you do decide to carry out a money transfer, be sure to set up a direct debit to pay off at least the minimum amount each month because if you miss a month's payment, your 0% deal could be whipped away from you. Of course, if you can afford to pay off more than the minimum monthly repayment, this is even better as you'll clear your debt more quickly.

However, it's worth bearing in mind that if you are looking to clear your overdraft, there are other options. Some current accounts, for example, offer interest-free overdrafts for a number of months and the advantage is that you won't have to fork out a transfer fee.

The Nationwide FlexDirect current account, for example, offers a fee-free overdraft, but this is only for 12 months. After this, you'll pay 50p per day on arranged overdrafts of £10 or more. You can read more about the account here.

Alternatively, if you can cope with a fairly small overdraft, the First Direct 1st Account offers an interest-free overdraft of £250 and you'll receive £100 for switching to the account. If you go over the £250 limit though, you'll be charged an APR of 15.9%.

For more top tips on how to clear your overdraft, take a look at my article.