MONEY COMMENT
How To Use A '0% Forever' Credit Card

By Cliff D'Arcy
October 7, 2003

In an ideal world, each of us would learn to live below our means and avoid getting into debt. However, because the real world is far from ideal, Britain's debt burden just keeps getting bigger. Since I joined the Fool in January, I've written many articles about our growing debt mountain. Here are the figures I've reported:

(£billions)     Mortgages   Other debts   Total
November 2002      663          155        818
February 2003      686          158        844
June 2003          714          164        878
July 2003          722          166        888
August 2003        730          167        897

Our borrowing is rising by between eight and ten billion pounds every month and, at this rate, we will collectively owe a trillion pounds in less than a year's time - that's a one with twelve zeros after it!!!

At the Fool, we make our views on borrowing pretty clear: we don't like any debts, other than mortgages used to buy homes. Other debts, such as secured loans (second mortgages), personal loans, overdrafts, and credit cards in particular, can be terribly expensive.

However, we all splash out now and then, so here's a cheap alternative to punishing your bog-standard credit card: get a 0% credit card. Borrowing money without paying interest is very Foolish, so transfer your debt to a card that charges no interest for an introductory period and feel smug! Here's how to do it.

Alternatively, you could transfer your debt to a card that charges 0% interest on balance transfers for life. However, there's no such thing as a free lunch, so Barclaycard insists that you spend at least £50 a month on its 0% forever card, or the interest rate on your transferred debt rises to 6.9% APR. (This is still cheaper than the standard interest rates charged by all other credit cards.)

Interest is charged on your purchases at the standard interest rate, which varies between 11.9% and 24.9%, depending on your credit rating. As your monthly repayments pay off your 0% debt first, you'll pay interest at the full whack on your purchases until you've paid off your entire balance (transferred debts, purchases and accrued interest).

Here's an example:

• You transfer £5,000 to a 0% forever Barclaycard that charges 17.9% APR on purchases, which is the typical rate Barclaycard offers new customers, which works out at 1.382% per month.
• The minimum monthly interest charge is 50p.
• You spend the required £50 on your card as soon as your account is opened and at monthly intervals thereafter.
• You make monthly repayments of 3% of your reducing monthly balance.
• You stop spending on your card when your 0% debt has been completely paid off .
• (One added bonus is that you earn 2% cashback on purchases until December 2004.)

Here's how much interest you pay, plus the year-end debt balances:

(£)     Year-end total balance (0% + Interest-bearing)  Annual int.
Year 1      4,015 (3,358 +   657)                           57
Year 2      3,432 (2,001 + 1,431)                          174
Year 3      3,146 (803   + 2,344)                          313
Year 4      2,984 (0     + 2,984)                          468
Year 5      2,453 (0     + 2,453)                          453
Total interest over five years                           1,465

Note that, after 45 months, your £5,000 transfer will be paid off, because all of your monthly repayments went towards paying off this 0% debt first. At this point, you'll have a balance of £3,084 (made up of purchases and accrued interest) at an interest rate of 17.9% APR. Yuk!

If you stick with Barclaycard to pay down this remaining interest-bearing balance, you will take a further 226 months to clear it. This means that your original £5,000 debt takes 22 years and seven months to pay off, which is almost as long as a mortgage! More bad news: you'll pay a whopping £3,478 in interest in total, so this is far from being a sensible debt!

The smart way to use Barclaycard's 0% forever card is to turn it into a Nice Card. Pay a fixed monthly amount of 4% of your transferred balance (that comes to £200 a month on our £5,000 transfer). This way, you'll pay off your £5,000 transfer in just 25 months, at which point you could stop spending on your card, cut it up, and transfer the remaining debt of £1,501 to another 0% credit card.

Alternatively, if you leave it on your Barclaycard, this £1,501 will be paid off in nine months, at the end of month 34. This way, your total interest bill would be around £353 - about half what you'd pay in interest on a cheap personal loan of £5,000 over three years

So, this 0% forever offer is a pretty cheap way to borrow, but only if you approach it in the right way - Foolishly!

More: Visit our Credit Card Centre.