'Is it time to end the 'always pay off your 0% balance transfer' before it...' blog

Former_MSE_Helen

This is the discussion to link on the back of Martin's blog. Please read the blog first, as this discussion follows it.

Read Martin's "It's time to end the 'always pay off your 0% balance transfer' before it ends rule?" Blog.

Please click 'post reply' to discuss below.

jamesd

I'm not happy with the fixed payments assumption. The most efficient way to use a 0% card is to pay only minimum payments until the day before the offer ends, keeping the rest of the repayment money in a savings account, mortgage offset account or other suitable place. This can work really well with things like HSBC's 8% regular saver account and a more than 12 month 0% deal. Using fixed payments and neglecting the interest received skews the comparison more against 0% cards than it would otherwise be.

It's also likely to be cheaper to divide expected amount owed at the end of the 0% deal by monthly spending to work out how many months of spending it'll take to accumulate enough to clear the 0% balance remaining. then apply for a 0% for purchases card far enough in advance to make that spending. Spend on the purchase card, put he spent money into savings or wherever and then repay the ending 0% balance from savings, leaving the money on the 0% for spending card without paying a balance transfer fee. Repeat as necessary.

I am glad to see this change in presentation to recognise the benefits of long 0% deals, though. Nice job overall!

MSE_Martin

jamesd wrote: »

I'm not happy with the fixed payments assumption. The most efficient way to use a 0% card is to pay only minimum payments until the day before the offer ends, keeping the rest of the repayment money in a savings account, mortgage offset account or other suitable place. This can work really well with things like HSBC's 8% regular saver account and a more than 12 month 0% deal. Using fixed payments and neglecting the interest received skews the comparison more against 0% cards than it would otherwise be.

It's also likely to be cheaper to divide expected amount owed at the end of the 0% deal by monthly spending to work out how many months of spending it'll take to accumulate enough to clear the 0% balance remaining. then apply for a 0% for purchases card far enough in advance to make that spending. Spend on the purchase card, put he spent money into savings or wherever and then repay the ending 0% balance from savings, leaving the money on the 0% for spending card without paying a balance transfer fee. Repeat as necessary.

I am glad to see this change in presentation to recognise the benefits of long 0% deals, though. Nice job overall!

You make a valid point on fixed payments - however do remember this is primarily in the context of balance transfers not stoozing - where the logic is often different.

The primary purpose is for people to clear their debts. While we'd love to incorporate variable payments, its impossible to do in any way that would make it easy and meaningful for people to understand (or at least we havent thought of a way to do that with the tool yet!).

Ta for the comments

2sides2everystory

Dodgy message Martin.

Those of us who fully understand the argument you make would rarely be faffing with such deals in the first place.

I would guess that a proportion of the sizeable chunk of your audience who read but don't fully understand your point will now blunder off the end of these so called 0% balance transfer deals into very expensive mistakes purely on your headline say so.

I do think you should consider putting a 'restricted distribution - research purposes only' notice on some of your blogs

jamesd

Maybe fixed payments, entries for card minimum payment percentage, savings rate, tax rate and deal term. Fixed payment make sense for money available each month, the challenge is finding out how to allocate it properly and keep things simple enough. But I think that's more material for an advanced tab, not the mainstream version. Have to consider the range of understanding levels and watch out for the complexity for a big audience.

MSE_Martin

2sides2everystory wrote: »

Dodgy message Martin.

Those of us who fully understand the argument you make would rarely be faffing with such deals in the first place.

I would guess that a proportion of the sizeable chunk of your audience who read but don't fully understand your point will now blunder off the end of these so called 0% balance transfer deals into very expensive mistakes purely on your headline say so.

I do think you should consider putting a 'restricted distribution - research purposes only' notice on some of your blogs

The question is whether them blundering onto the goto apr is so bad if they've had the 0% in the first place and clearing a chunk of their debt.

Of course its less than desired, but if its that or going for a long term lock in rate that's so much more expensive early on that's the balance - even for less sophisticated readers.

As for restricted distribution - now there's a thought...

Consumerist

Though bizarrely there are now even a few extreme scenarios when it’s not cheaper to switch again. For example, if you only had a small amount left at the end of the 0% the fee for switching would be bigger than the interest cost by the time the card is cleared.

But surely, if you only had a small amount left at the end of the 0% then the fee for switching would be correspondingly smaller too.

JimmyTheWig

Consumerist wrote: »

But surely, if you only had a small amount left at the end of the 0% then the fee for switching would be correspondingly smaller too.

It's not the size of the balance, per-se, but the number of months it will take you to repay.
If you pay a 3% fee to transfer a balance and then clear that balance in 2 months that will be the equivalent (I believe) of about 24% APR.

Consumerist

JimmyTheWig wrote: »

It's not the size of the balance, per-se, but the number of months it will take you to repay.

Agreed. It makes more sense to put it that way.

Since the introduction of transfer fees, it seems to me that it's always been a trade-off between the transfer fee and the interest charged on the remaining balance when deciding whether or not to transfer again. I don't see that call as being bizarre, though.

MSE_Martin

JimmyTheWig wrote: »

It's not the size of the balance, per-se, but the number of months it will take you to repay.
If you pay a 3% fee to transfer a balance and then clear that balance in 2 months that will be the equivalent (I believe) of about 24% APR.

Good point, I will tweak my phrasing in the blog

jamesd

That's what makes 0% for purchases cards so good for virtually transferring the balance at the end. No fee, just a bit of advance planning to put normal spending on them for a while to accumulate enough in savings or extra payments to clear the original card.