What is the benefit of a 0% interest credit card balance transfer?

A journalist asked me today what my views were on these transfers.

I said the following.

1) If you are paying interest on your credit card, you are not using it properly and should tear it up.
2) If you have a balance of, say, €5,000 , transfer this to An Post and get 15 months' interest-free, but tear up your An Post Credit Card and don't use it.

If you continue using your credit card after a 0% balance transfer, you greatly reduce the benefit of it.

Is the following right? The figures are rounded, but I just want to get the general picture.

Interest charged on existing credit card at 10%


Transfer balance to a credit card charging 0% for 15% months.
Monthly repayment is set off against the 0% balance first.
So interest is charged on new purchases every month.

I have used 10% as the interest rate on both cards.

But if the new card charges you a much higher rate, the advantage will wear off very quickly and you will be stuck with a high interest credit card.

Brendan

Think of it from the banks perspective. Why do they offer 0% transfers? Because in the longer term, a high number of those customers will end up paying interest. The bank is in it to make a profit.

However, for people who are extremely disciplined, they can be used to your advantage. Say you need to borrow 10k to change a car, and you know you'll be able to repay over 15 months. Pay on your credit card, then transfer the balance to An Post, and you've an interest free loan for 15 months.

But, it takes discipline.

I've seen people manage large amounts of short term debt this way. And I've seen people get caught, and paying 15% interest when they couldn't switch again.

I have done two balance transfers...for one KBC made me close down my original one, so I had to make sure to pay off all new purchases (which I normally would anyway) but An Post didn't have any conditions. So I could use the original one for new purchases and just forget about the transferred balance one.

One transfer was indeed for a car....combination of the balance transfer and the delayed payment of VRT (UK import) meant that we paid no interest, just the gvt tax. This led me to then do the same to purchase a large item of furniture, we could have waited and saved but interest free meant that we could enjoy it sooner. It is def only for those who have the cashflow and discipline to work the system so they do actually get 0%.

misemoi said:

I had to make sure to pay off all new purchases (which I normally would anyway)

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Can you clarify this?

You don't pay off new purchases as such.

If you have a balance transferred of €12,000 and you purchase €1,000 in the first month, and pay €1,100, the €1,100 is set off against the €12,000.

And so you get charged interest on the €1,000.

On a 0% transfer, does the 0% apply to the amount transferred? So in effect, if you pay off the monthly activity there would be no interest payable

If you plan to overpay to not just pay off the month's activity but to also reduce outstanding, there is a benefit - you get a window of free credit to pay off the balance (or reduce it)

EmmDee said:

So in effect, if you pay off the monthly activity there would be no interest payable

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But that is the catch. You can't pay the monthly activity.

Any payments you make are first set against the transferred balance. So the monthly activity is unpaid so interest is charged on it.

Brendan

Brendan Burgess said:

But that is the catch. You can't pay the monthly activity.

Any payments you make are first set against the transferred balance. So the monthly activity is unpaid so interest is charged on it.

Brendan

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Ahh - makes it a lot more complex so

Brendan Burgess said:

Monthly repayment is set off against the 0% balance first.
So interest is charged on new purchases every month.

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I missed this piece.

No.

The first offset against Balance Transfer only kicks in when the same interest rate is applied to all balances.

From T&C's:
13c If any payment made to your account is not enough to pay off the whole balance in full on the date that payment is applied to your account, we will use it towards paying off the different parts of the balance shown on your statement that are charged at higher interest rates before those that are charged at lower interest rates. We will then use the rest, if any, to pay off the different parts of the whole balance added to your account and not yet shown on your statement that are charged at higher interest rates before those that are charged at lower interest rates. If we use a payment for items that have not appeared on a statement, we will use it to pay off all fees and charges applied to the account up to the date of the payment before any transactions applied to the account. Paragraph 13d describes how your payment will be used if interest is charged at the same rate on different parts of that total balance.
13d Depending on how we use payments under paragraph 13c, if interest is charged at the same rate on different parts of the balance on your account (for example, two types of transaction which earn the same rate of interest), or if after having applied your payment as set out in paragraph 13c there is still a balance on your account, we will use your payment in the following order – balance transfers, cash transactions, money transfers, and card purchases.

RedOnion said:

we will use it towards paying off the different parts of the balance shown on your statement that are charged at higher interest rates before those that are charged at lower interest rates.

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Hi Red

Are you sure that is what it means?

I think that the interest rate is zero on balance transfers and new purchases which have not yet attracted interest.

So "we will use your payment in the following order – balance transfers, cash transactions, money transfers, and card purchases."

So it looks as if new purchases do not attract interest.

Therefore they set the payment off against the balance transferred first.

When it is cleared, they start charging interest on the purchases?

Brendan

Brendan Burgess said:

Are you sure that is what it means?

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It looks like that's what it's intended to mean, but saying it in the longest way possible.

If it means the following, they should say it:

We won't charge you any interest on the balance transferred for 15 months.


Any payments you make will be set against your new purchases , so that if you pay the new purchases every month on time, you won't pay any interest.


which is why I don't think that is how it works.

Brendan

Brendan Burgess said:

If it means the following, they should say it:

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Looks like the reason it's not that simple in T&C's, is so that it covers all AvantCard promotions. They've another offer at the moment with a reduced rate on balance transfers.

It's not very clear to me (again, Credit cards are not my comfort area).

@Brendan Burgess
Different bank, but here are the T&C's for PTSB :

Payments
(e) Payments will only take effect when received at our processing centre and are credited to your Account.
(i) Payments are applied to the opening balance on the Account in the following order against the Transactions and Cash Advances already shown on the Statement:
Interest and charges (if relevant);
Fees (if relevant);
Cash Advances (in order in which they were
applied to the Account);
Purchases (in order in which they were applied to the Account);
Balance Transfer (where applicable).
(ii) The remainder of the payment, if any, is
applied against current Transactions and Cash Advances not shown on a Statement in the following order:
Interest and charges (if relevant);
Fees (if relevant);
Cash Advances (in order in which they were
applied to the Account);
Purchases (in order in which they were applied to the Account);
Balance Transfer (where applicable).

That is much clearer.