Introducing a smarter way to cut your borrowing costs: Money transfer credit cards
Money transfer credit cards may not be that well known, but they could be a good option for tackling expensive debts. Here's everything you need to know.
We've teamed up with money maestro Andrew Hagger to help you get to grips with these particularly complicated cards. He really knows his stuff when it comes to finance, having spent over 30 years working with some of the biggest names in the industry before turning his hand to writing. Over to him.
Many people have taken advantage ofto shrink their credit card interest charges, but few have cottoned on to the potential benefits of money transfer cards.
Money transfer cards have a feature which lets you transfer money directly into your bank account. This can make them a possible option if you want to clear any high-cost overdrafts or loans.
How it works
The unique selling point of money transfer credit cards is that you can use them to transfer money directly into a bank or building society account.
You can then spend it how you wish – something you can’t tend to do with regular credit cards. (But before you take a bath in all that cash, remember you will have to pay back whatever you borrow.)
If you take out a money transfer credit card, you’ll usually be able to borrow interest-free for up to 36 months.
This means any money you transfer or spend as normal, won’t accrue any interest in this time – you’ll only have to pay back the amount you borrow.
Just bear in mind that you have to make your transfer within the first 60 days of applying for the card to qualify for the 0% rate.
Are there any fees?
These cards do come at a cost though, there’s an up-front ‘money transfer fee’ that you have to pay anytime you transfer cash from the card into your account.
The money transfer fee is usually 3% to 4% of the amount you transfer to your bank account. For example on a £3,000 transfer, a 3% fee will cost you £90, making your card balance £3,090.
If you are accepted for the card and go on to make a money transfer it’s sensible to set up a standing order to pay the minimum payment each month. If you are late with a single monthly repayment the lender has the right to cancel the 0% introductory rate on the spot – so best not to give them that opportunity.
Why it might make sense for you
If you are consistently in the red and being charged interest by your bank each month, then a money transfer card could be an option to consider. Paying off an expensive overdraft once and for all could save you money. That's because unlike an overdraft, a money transfer card is interest-free.
It might be worth canceling your overdraft limit if you do – it takes away the temptation of using it again and running up new debt.
Similarly, if you have a loan or maybe car finance, the 0% card will allow you to repay some of those and save you the costly interest charges.
What’s the catch?
There are a few things you need to be aware of to make the most of a money transfer credit card:
1. You’ll need a pretty good credit history to be accepted.
If you’ve had a few issues managing your money in the past you may get declined or offered a lower 0% duration or higher interest rate. Read up onto help improve your chances of being accepted.
2. The 0% rate is only for a limited period.
You don’t have to repay in full by the time the promotional 0% rate ends, but if you don’t you’ll pay the standard interest rate of around 23% APR – so it’s best and cheaper if you can.
3. Most transfers need to be approved by the lender before they go through. And you can only transfer money into your own account.
4. If you change your mind you’ll still have to pay the fee. Once a transfer has been processed you usually can’t cancel and you won’t get the fee refunded.
5. You don't get the same level of protection as a credit card. Any purchases you make with the transferred money won’t be covered by the consumer credit act.
How to get the best from a money transfer card
If you do decide to use the money transfer feature it will be added to your credit card bill alongside any other spending. Every month you’ll get a card statement telling you how much your minimum repayment is – but if you’re smart you’ll pay more than the minimum.
In fact, it makes sense to treat it more like a loan.
So, once you've done the money transfer, add the balance that you transferred to the fee you paid and divide this by the number of months your 0% period lasts. This will show how much you should pay each month to make sure your card balance is fully repaid by the time your interest-free deal ends. Say you transferred £3,000 with a 3% fee, that'll bring your total balance to £3,090. If you have a 30 month interest-free period, then you should aim to pay at least £103 a month (that's £3,090 divide by 30).