Balance transfers still pay interest?

monkees

Hi, For a particular balance transfer credit card, it states the following: Always pay at least the monthly minimum repayment (1% of your balance plus interest, 2.25% of your balance or £5, whichever is higher). Please can you clarify that a) is it suggesting 3 different ways/amounts of repayment depending on which is the higher? 2) what interest on the 1% would that be referring to because I thought the point of these cards was to pay 0% interest for the deal's duration eg 29 months or 18 months etc at 0% interest. Perhaps you could give me an example on £3,000 balance transfer - what should I pay monthly, for the first 0% interest free period? Thank you in advance for your help.

[Deleted User]

A) yes - it is the highest of the three calculations

2) on a 0% deal, it will be 1% plus interest, with the interest during the promo period being charged at 0%. After the promo period, the interest will be at the go to rate.

On a 3k balance, the highest of the three calculations would be 2.25% of balance, so £67 50.

jay1804

Basically if you had a £3000 balance at 18.9% 

The credit card provider wants the highest amount of of the three options and that would be your minimum for that month.

Option 1)1% of balance plus interest = £30 + £47.25 = £77.25
Option 2) 2.25% of balance = £67.50
Option 3) or £5 = £5

So in this case your minimum for that month would be option 1.

Whereas if you had at £3000 balance at 0%

The credit card provider wants the highest amount of of the three options and that would be your minimum for that month

Option 1)1% of balance plus interest = £30 + 0 = £30
Option 2) 2.25% of balance = £67.50
Option 3) or £5 = £5

So in this case your minimum for that month would be option 2.



So if you had a £3000 balance @ 0% and made no extra spending your minimum payment would be £67.50 a month until the offer period runs out.

However most people, suggest to divide your balance by the number of months of the offer period and pay that per month so that the balance is cleared by before the offer finishes.

£3000 @ 0%

3000/18 = 166.666666666666667

18 months = £167

3000/29 = 103.448275862068966

29 months =  £104

Hope this makes sense.

msallen

jay1804 said:

However most people, suggest to divide your balance by the number of months of the offer period and pay that per month so that the balance is cleared by before the offer finishes.

Really? I've never done that, and its far from usual behaviour by any regulars on here. The standard behaviour is to pay the minimum (or some will add a quid to it) and put anything else into a savings account so that you can clear the balance from the savings account when the promotion expires.

Ebe_Scrooge

msallen said:

jay1804 said:

However most people, suggest to divide your balance by the number of months of the offer period and pay that per month so that the balance is cleared by before the offer finishes.

Really? I've never done that, and its far from usual behaviour by any regulars on here. The standard behaviour is to pay the minimum (or some will add a quid to it) and put anything else into a savings account so that you can clear the balance from the savings account when the promotion expires.

It makes little difference in practice.  The most important thing is to ensure the balance is cleared, one way or another, by the time the promo rate expires.  Dividing the balance by the number of months of the promo and paying that amount each month has the benefit of allowing you to budget easily, and will make sure you're not stuck with a balance at the end of the promo.

Putting an equivalent amount aside each month into a savings account, and using that to make a lump-sum payment at the end (only paying the minimum to the card each month) has the same effect.  The problem is, for some people the temptation to dip into that savings pot can be too strong.

The "savings account" method used to be preferable because you could earn interest on the money whilst it was in there.  But these days, you're lucky if you can get even a miniscule amount of interest, so the advantage is negligible.

To the OP - the "1% plus interest" thing is often a source of confusion.  The easiest way to think of it is that interest is ALWAYS charged on an outstanding balance.  It's just that the rate of interest varies.  So for the first 18 months or whatever, you're charged interest at 0%.  After that, interest will be charged at 22% or whatever their standard rate is.  It's not that they don't charge interest for the promotion, it's just that the rate is 0%.  Hope this helps to clarify - in addition to the excellent replies/examples you've already received.

Your statement will clearly show what the minimum payment each month is.  Just make sure you pay at least that amount, otherwise they'll immediately terminate the promotional offer and you'll revert to their standard APR.

phillw

Ebe_Scrooge said:
The problem is, for some people the temptation to dip into that savings pot can be too strong.

The "savings account" method used to be preferable because you could earn interest on the money whilst it was in there.  But these days, you're lucky if you can get even a miniscule amount of interest, so the advantage is negligible.

Regular saver accounts are good for preventing the temptation of occasionally dipping into the account. Although someone who was unable to resist their temptations could just as easily not pay into either a credit card or regular saver and instead go on the spend using their available credit.

I agree that going from 5% to 1% regular savers in the last year has made it less attractive in terms of effort though.

[Deleted User]

msallen said:

jay1804 said:

However most people, suggest to divide your balance by the number of months of the offer period and pay that per month so that the balance is cleared by before the offer finishes.

Really? I've never done that, and its far from usual behaviour by any regulars on here. The standard behaviour is to pay the minimum (or some will add a quid to it) and put anything else into a savings account so that you can clear the balance from the savings account when the promotion expires.

It might be unusual for regulars who are determined to squeeze every penny from the savings but given the current climate (look how many non-regulars are posting about getting no new BT offers at the end) it is a massive risk to pay the minimum and hope to get another BT at the end or when you're talking about ~£20 interest on a £3000 regular saver at 1.5% it really isn't worth the gamble. Paying off the sum monthly to clear it by the end is the only logical process at least until BT offers become more regularly available unless you have the money saved somewhere to clear it and can be 100% sure you can't touch it.

Personally I pay down the balance to clear each BT as close to the end as possible and have largely given up on regular savers, the 20%+ growth in my S&S ISA is a far better (long term) investment to pay into. £50 a month to the NatWest 3% saver and £100 a month to Nationwide Start to Save on the off chance I win something in their draw is all I am doing.

monkees

Thank you to all of you for your fantastically helpful advice and comments. You have helped me understand this clearly. What a relief! Thanks!

born_again

msallen said:

jay1804 said:

However most people, suggest to divide your balance by the number of months of the offer period and pay that per month so that the balance is cleared by before the offer finishes.

Really? I've never done that, and its far from usual behaviour by any regulars on here. The standard behaviour is to pay the minimum (or some will add a quid to it) and put anything else into a savings account so that you can clear the balance from the savings account when the promotion expires.

Ok when you got a decent rate on savings. But now when 0.6% is a good rate. It's hardly worth it.

Sadly far too many did not even transfer anything to pay off at the end of the term. They relied on getting another 0% deal and moving the balance over.
That boat for the most in need sailed last year. Seems the only people that get the best offers are the one's who do not need them.