0% balance transfers could be doomed!

Will a government clean-up of the credit-card market kill off 0% balance transfers? If so, then try a lifetime balance transfer...

Over the past two years, the average interest rate for credit-card purchases has climbed from 16.3% APR to 18.1% APR today. Thus, a typical credit card charges interest at 36 times the base rate on purchases -- and 25%+ APR for cash withdrawals!

A cure for rising rates

The simple way to stop paying interest on credit-card debts is to move your existing balances to a credit card which offers 0% balance transfers.

With a 0% transfer, you pay no interest on transferred balances for an extended period, typically five to sixteen months. The longest 0% balance transfer comes from the Virgin Credit Card, at 0% for sixteen months.

Of course, there's no such thing as a free lunch, so a transfer fee is added onto your debt. Typically, 0% balance transfers attract a 3% fee, although Virgin's fee is slightly lower at 2.98%. Thus, a balance transfer of, say, £2,000 incurs a typical fee of £60.

In effect, transfer fees mask the true cost of 0% deals. Over the course of a year, a 3% fee is the equivalent of an interest rate of 5.7% APR. Thus, transfer fees subsidise the cost of providing this interest-free credit.

Bad news for rate tarts

I've been a '0% rate tart' since Egg launched the first 0% balance-transfer deal on Christmas Day, 2000. In other words, for over nine years, I've taken full advantage of (and made thousands of pounds from) 0% transfers.

Then again, the 0% game is getting progressively harder and is set to get tougher still. This is because the government has released a Consumer White Paper aimed at cleaning up some of the worst practices of credit-card issuers.

When these proposals become law, they will reduce card issuers' income, forcing them to cut costs and seek out new revenue streams. Given that 0% balance transfers are the industry's biggest loss-leader, I expect them to come under pressure in the next year or so. So, I expect the number, length and attractiveness of 0% balance transfers to decline in 2009/10.

This is obviously bad news for credit card tarts.

Would a lifetime balance transfer be better?

As card issuers withdraw 0% deals and tighten their credit criteria, the 0% game will get harder. Thus, while the 0% game is not yet over, the rules are set to change.

Another problem with 0% balance transfers is that they require rigid discipline. Unless you've repaid your entire balance before an existing 0% deal ends, you'll need a new 0% card to replace it. Otherwise, you'll start paying interest on your existing card. And, at a typical monthly rate of 1.4%, interest soon stacks up over time...

Hence, many borrowers would be better off shifting their card debts to a lifetime balance transfer card. With a lifetime transfer, you don't keep jumping from one card to another. You simply pay a low, fixed rate of interest on your debt until it is fully repaid.

Pay off at your own pace

Thanks to their flexibility, lifetime balance transfers have the edge over unsecured personal loans. Personal loans have fixed monthly repayments, but you can repay as much or as little as you wish when you've got a lifetime transfer card (subject to your card's minimum monthly repayment, of course). Also, Best Buy loan rates are upwards of 7.9% APR, so they aren't cheap in relative terms, while lifetime balance transfer cards start at 6.8% APR, as this table shows:

Best Buy lifetime balance transfers

And the winner is...

I'm not keen on the two NatWest and two Royal Bank of Scotland cards listed above, because they charge yearly interest at 8.9% APR, which is too high for my liking. This leaves three cards, but out goes the Citi AAdvantage card, thanks to its 3% transfer fee and £25 annual fee.

My gold medal goes to the Barclaycard Simplicity Visa card. It charges 6.8% APR on balance transfers of £250 to £5,000, with no balance transfer fee if you apply through lovemoney.com.

Is a lifetime balance transfer card a good option for you?

If you're sick of chasing 0% deals and want to kill off your credit card debts once-and-for-all, without lots of hassle, then yes, a lifetime transfer could be right up your street.

Simply transfer your balances, set up a monthly direct debit, and watch your balance dwindle. It won't take long!

More: Check out these cracking credit cards | A huge victory for British borrowers | Credit-card costs continue to climb!