Rate tarting is back!

Alison Hunt has some seriously good news for anyone with credit card debt.

Credit cards have certainly changed over the years. When I was young they were bits of plastic that weren't given out lightly, had small credit limits and huge APRs. Parents that did have one used them very carefully indeed.

Time ticked on and more lenders got in on the act.

0% balance transfer card

Everything changed in 2000, when Egg launched the first 0% balance transfer card. Borrowers were given the chance to transfer their debt to the Egg card and pay no interest on it for six months.

Things progressed from here with other lenders following suit and offering longer and longer 0% periods - up to 18 months in some cases.

This provided many people with essential breathing space to pay off their debts.

The birth of the rate tarts

But some wily folk took things even further. Not only did they move their debt to a 0% card, but instead of paying it off, once their free period was up they'd move their balance to another 0% card, and benefit from another interest-free period. And then they'd do it again. And again. And again.

Chasing the 0% rates in this manner gave them the nickname "rate tarts" and some got it down to a fine art. And as many used the cash they'd saved to help pay down their offset mortgage or stashed it in a high interest account, it turned into quite a lucrative scheme.

Capped BT fees

The good times didn't last, however, and by 2005, 29 lenders had introduced a Balance Transfer (BT) fee. This was charged at a percentage of what you borrowed and meant lenders could offer 0% deals while still making money - even from the rate tarts.

So if you moved a £3k balance to a 0% card with a 2% BT fee, it would cost you £60. Ouch.

Current situation

What's more, the cost of 0% cards has continued to rise with some lenders now charging BT fees as high as 5%. Yikes. Transfer £3k to one of these and you'll have to fork out £150 for the privilege.

Couple that with the fact that lenders are becoming pickier about who they'll lend to and you may wonder whether 0% cards have had their day?

Luckily there are still a few good deals out there.

Top 0% Balance Transfer credit cards

Source: Moneyfacts

Can you still save with a BT card?

So is it still possible to save with a BT card?

Say, Tom, for example, transferred his £3k balance from his HSBC credit card (16.9%APR) to the Virgin Credit card. He can afford to repay £190 per month.

Now, he'd have to pay Virgin's 2.98% fee of £89.40, but he'd get 16 months to repay the debt while paying no interest - so after 16 months he'd have enough money to repay that debt in full. He wouldn't have had to pay anything in interest, but he would have had to fork out that £89.40 fee.

If, on the other hand, he left the debt where it was and made monthly payments of £190 per month, it would take him 18 months to completely repay his debt and cost him nearly £417 in interest.

So in this case taking out the Virgin card would save him £327.49. Of course, how much you can save depends on how much you need to transfer and how much time you need to pay off your balance.

A new alternative

But 0% credit cards with BT fees are not your only option. And, in some cases, there is a better option.

I'm referring to the Platinum Plus credit card, launched by MBNA this week. This is not a 0% card. Instead it offers an ultra low balance transfer rate of 1.9% APR for 12 months, with no balance transfer fee. In some cases, this could work out cheaper than even the Virgin card!

This makes it a very attractive card for rate-tarts, particularly when you consider that top instant access savings accounts offer 3.2% AER or more.

In other words, this new MBNA card means rate-tarting is well and truly back in fashion!

But if you are thinking of taking out either the MBNA card, the Virgin card or any other balance transfer card, there are a few things to be aware of to avoid falling foul of interest, fees and charges:

0% Balance Transfer Card rules

1) Cut up the card when you've transferred over the balance.

Unless you've been fortunate enough to find a card that offers 0% on balance transfers and new purchases for the same period (or operates using positive payment hierarchy) spending on the card will result in you being charged interest, completely negating any saving made.

2) Set up payment by direct debit

You must make the minimum payment each month or you risk being slapped with interest and charges. You may lose out on the 0% interest deal and even worse, in the current climate a missed payment could become a black mark on your credit record. Make life easier by setting up payment by direct debit.

3) Make sure you can pay back the money you owe

Use the 0% period seriously. If you have 16 months' grace, then divide your debt equally and save that amount each month (or more if you can).

4) Know who's behind the mask

Finally, while credit cards may each have fancy names, many are from the same financial provider. And applying for a new 0% card from the same group can mean automatic refusal. Avoid this by knowing who you're dealing with.

One thing's for sure, with the fall out from the credit crunch resulting in increased pickiness (plus lower credit limits) from lenders, it's getting harder and harder to make enough money from "rate tarting" to make it worth your while.

But as a genuine way to help us clear our debts, 0% credit cards are still a great tool. Maybe it's time to think of them like that?

More: A new top balance transfer card | How to make some free cash

Compare 0% credit cards at lovemoney.com