MBNA has just released a new balance-transfer card – which is a credit card that allows you to transfer debt from other credit cards to it. You pay no interest for 14 months and it has a new low fee of 1.25%.
It's up against some heavy competition though. Take a look at this table, which contains the best cards I could find when considering both the length of the deal and fee size:
The best 0% balance-transfer cards
The table shows that the cheapest card, the Barclaycard at the bottom, costs just 0.9%, or £9 per £1,000 borrowed. But the deal lasts just 12 months. For many people, that might not be long enough.
The longest deal is another Barclaycard, at the top of the table. This lasts twice as long at 24 months. The fee is also higher, at £42.
Which deal is best?
You have to consider both the length of the deal and the fee size. But is a 13-month deal with a 1% fee better than a 12 month deal with a 0.9% fee? Or is a 24-month deal with a 2.1% fee better value than a 23-month deal with a 1.9% fee. And where does the new MBNA card with its 14-month deal and 1.25% fee fit?
Luckily, there's an easy way for me to answer this for you.
The following table shows the same cards, but this time it has a new column on the right-hand side. This new column converts the fee into an effective interest rate. Interest rates take into account not just the price (in this case the fee) but also the length of the deal. Hence, the lower the interest rate, the better the deal is:
Top cards, ranked by "interest rate"
Some readers express scepticism about why lenders charge fees instead of interest but, as you can see more clearly now from the table above, these cards really are a very cheap way to borrow, costing an effective interest rate of between 1.7% and 2.1%. That's how much interest you'd pay if these cards were normal loans.
With this table organised by value-for-money, the longest deal – the 24-month deal – has moved down to the middle of the table, but with an effective interest rate of 2% it's just fractionally more expensive than the cards above it.
The 12-month and 13-month deals are the best value; they are worth the same because the longer deal is just slightly more expensive.
This table shows that, on the whole, mid-length deals – such as the new MBNA card – are worse value for money, because their fees are too high for the length.
There's a better way to pay down your debt
The above table assumes you'll pay off your entire debt in equal instalments, and you pay your final instalment in the last month of the 0% deal.
If you pay off more debt earlier instead, you won't have used the entire deal to its full advantage.
Conversely, there's a way to make the deal a little bit better for you by paying off your debt more slowly. Read on if you truly want to save the pennies:
1. Add up your total debt and divide it by 12.
2. Repay just the minimum amount for every month of the 0% deal.
3. Save the difference in a top easy-access savings account for 12 months.
4. In the final month of the deal, use your savings to pay off the rest of your card debt.
Point three states that you should save the difference over 12 months. That's just an example. If you can save more quickly, that's even better. If you can't, that's ok, so long as you save up as much as you can before the end of the deal.
Here's an example with real numbers, using the new 14-month MBNA card as an example:
1. You have transferred £1,000 to the card and the fee is £12.50, so your total debt is £1,012.50. Divide this by 12 and you have £84.38.
2. The minimum repayment on this card is £25 per month, which is what you pay.
3. You need to save the difference every month for 12 months, which is £84.38 - £25 = £59.38.
4. In the 14th month, you'll repay the outstanding balance. Your savings account has enough in it to clear the debt, with a few pounds to spare thanks to earning a little bit of savings interest.
The following table shows the same cards re-ranked to show which is best when using this technique. The "interest rate" in the final column reflects the length of the deal and the fee, minus the interest you've earned in the savings account:
Top cards when using this technique
*I assumed your savings account pays 2.35% interest before tax and that you're a basic-rate taxpayer (the bank automatically deducts basic-rate tax from the interest you earn in savings accounts).
At an effective cost of 0% interest, using the 23-month Barclaycard deal in conjunction with a savings account means that you're borrowing for free. Note that this is the case regardless of the amount you borrow. However, you need to move to a new savings account if or when your interest rate is reduced.
NatWest's 13-month deal and the Barclaycard 24-month deal come in joint second, with an effective interest rate of just 0.1%.
Again, the mid-length deals fared the worst, although they are all still dirt cheap.
Don't break the rules
It's very important that you always pay at least the minimum each month, or your interest-free deal will be stripped away from you, and you'll be charged sky-high interest rates. The same goes if you breach any other terms in the small print.
It's risky to let debt drag on for long periods, which is why you can't go wrong by paying it off as quickly as possible – or saving to pay it off in the near future. If you can't repay your debt before the 0% deal ends, don't stick around to face the massive interest rates that follow.