Question Of The Week: 0% balance credit cards

Former_MSE_Penelope

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put £3,600 in each tax year (£5,100 if you're over 50) and it then stays tax free year after year, so once the money's withdrawn, you're losing that allocation.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

td_007

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!

CannyJock

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