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Question Of The Week: 0% balance credit cards
Former_MSE_Penelope
Posts: 536 Forumite
Q. I owe £1,700 on a 0% balance credit card. When this ends, would it be better to transfer the remaining balance to another 0% card or pay it off from my ISA account? Rita.
A: While normally the rule is pay off debts with savings, that's different with 0% deals. On a pure financial calculation, even incorporating the fee, you'd be slightly better off if you shifted the debt to a new 0% Top Balance Transfer card and kept the money in a Top Cash ISA, as the debt costs less than the ISA pays.
Plus, with ISAs you can put £3,600 in each tax year (£5,100 if you're over 50) and it then stays tax free year after year, so once the money's withdrawn, you're losing that allocation.
Yet the counter-argument is that simply not having debt is better discipline. If you're not a financially savvy type, good with financial management, then it's probably best just to clear the debt.
Click reply to discuss
A: While normally the rule is pay off debts with savings, that's different with 0% deals. On a pure financial calculation, even incorporating the fee, you'd be slightly better off if you shifted the debt to a new 0% Top Balance Transfer card and kept the money in a Top Cash ISA, as the debt costs less than the ISA pays.
Plus, with ISAs you can put £3,600 in each tax year (£5,100 if you're over 50) and it then stays tax free year after year, so once the money's withdrawn, you're losing that allocation.
Yet the counter-argument is that simply not having debt is better discipline. If you're not a financially savvy type, good with financial management, then it's probably best just to clear the debt.
Click reply to discuss
0
Comments
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It is a really fine line. Considering that today BT fees are in the range of 3-4%, one needs an ISA to pay at least this amount to break even. Otherwise one pays more (in charges) than gets (in interest). There could some exceptions with low/no BT fees - 2.98% Virgin or 0% A&L for existing customers allow you to have your cake and eat it too!0
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Current Virgin 16 month 2.98% fee equates to 2.24% APR (can squeeze to nearly 17 months if you're clever with the statement date knocking it down to 2.10% APR).
Standard Life Cash ISA is offering 2.65% AER
It's "just" possible for this to work in the short term on a repeat balance transfer (Virgin fee increasing to 5% on 1st March
)
In the long term, there's no question that retaining/increasing the size of your Cash ISA pot will yield returns in later years, but realistically you're looking at the returns being 3 or more year away.
So either way, repeat BT is the preferred option "A child of five could understand this. Fetch me a child of five." - Groucho Marx0
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