Reduce the cost of balance transfer credit cards

We compare the latest and best balance transfer deals and show you how to reduce the cost.

How do you compare a balance transfer credit card lasting 15 months with a 3% fee versus one lasting nine months with a 1.7% fee? Which is best? I'll show you how, whilst showing you the best deals at present.

A 3% fee does not equal 3% APR

Fees are quite devious. As I explained in this article, a fee of 3% usually equals more like 4% to 11% APR. This is because you pay the fee up front on the whole balance, whereas when you're paying interest, you're just paying a portion of the interest each month. If you're reducing your balance each month then the amount you're paying is constantly going down. You don't get that benefit with an up-front fee.

I'm now going to show you a table. Don't start hyperventilating. There's a lot of detail in it, but I'll explain it to you afterwards:

Top balance-transfer deals

Assuming the transfer is paid off in full by the end of the deal

Pound figures rounded to nearest £1.

The first and second columns should be self-explanatory but what the heck, I'll explain them anyway. You see the name of the card in column one, headed Card. Notice that Play.com and Virgin are both MBNA cards and you can't apply for one if you're using the other, or have used it recently.

Column two, Deal, tells you how long the 0% offer lasts and the fee you have to pay, which is added to your existing debt when you take out the credit card. It also tells you if the offer is available to existing customers only.

The third column, Total repaid, tells you the total amount you'll have to pay, provided that you pay off the card before the end of the deal. It assumes you transfer £1,500. The cost will be higher if you transfer more, and lower if you transfer less.

In total, you'll pay £23 to £45 for any of these cards, on top of repaying the £1,500 you borrowed. This is assuming that you don't use your card for any other purpose (i.e. you don't spend on the card) nor fall for any of these 19 credit card traps.

Column four, Repaying in equal instalments, is where it gets interesting. It tells you what the fee works out as as an APR if you were to pay off your whole balance in equal instalments before the deal ends. (Actually, it's technically the 'AER', but in this case it works out the same as APR.) To take the Virgin card, for example, if you pay your £1,545 (the fee is included) equally over the whole deal of 16 months, it'll cost you £96.54 per month. However, in APR terms, that works out at 4.3%.

As you can see from that column, the APRs range from 4.2% to 5.3%. The highest APR comes from the one with the lowest fee: Play.com's new credit card with a six month deal and a 1.5% fee. This makes Play.com's deal the worst of the lot.

You should know that these APRs stay the same even if you transfer a larger or smaller amount. If you transfer £500 or £5,000, the APRs will remain the same.

Column five, Repaying minimum with balance at end, is the most interesting one. It shows the APR you'll pay if you just make the minimum repayments until the last month, when you pay off the remaining balance in full. The APRs are lower, ranging from 2.5% to 3.2%, which reflects that you've been able to borrow for longer at no extra cost. In fact, the top four cards in the table all have lower APRs than their balance-transfer fees when paid off in this way.

Columns four and five both show that the joint winners of the best deal awards are the Virgin and Barclaycards with the equivalent of 2.5% APR.

Again, increasing or decreasing the size of the transfer will not affect the APRs, although it will change the cost shown in column three.

Reduce the APR to 0%!

You can reduce what you pay effectively to zero (or thereabouts) like this:

1. Pay the minimum amounts rather than equal instalments.

2. Save the difference in a decent savings account.

3. Pay off the balance at the end with your savings.

This way, you're effectively earning interest on the money you've borrowed, which counters the minimal fee you've paid!

Compare credit cards through lovemoney.com

More: 0% deals are slipping away | Your Two Pence - The cost of credit card debt