FOOL'S EYE VIEW
The Cheapest Ways To Borrow

By Cliff D'Arcy
November 18, 2004

Regular Fool readers will know that I'm a big fan of credit cards. Not every card, you understand – only those that can make me money!

Regrettably, until a few years ago, I was completely hopeless at money management. Despite my being a mathematician by training, and having spent my whole working life in financial services, my finances were a mess. This was mainly caused by spending a great deal more than I earned over a long period!

Naturally, I ended up with hefty debts. At my low point, I owed the thick end of £50,000 across two or three personal loans and about a dozen credit cards. Of course, this Everest-sized debt didn't come cheap: I probably paid tens of thousands of pounds in interest before finally ridding myself of this burden. Yikes!

These days, I have evolved into a far more enlightened Fool. I've vowed never to be in debt again, and even hope to pay cash for my next home. I do borrow money, but I don't pay interest. That's because all my debt is on 0% credit cards...

0% on balance transfers

These little beauties make it simple to borrow money and not pay any interest. There are over sixty cards that allow you to transfer existing debts and not pay a penny in interest for up to nine months. The shortest deal that I've found has an introductory 0% rate on balance transfers for five months, the longest lasts until next September (around 9½ months), but most offer 0% for six months.

So, if you're paying any interest at all on credit and store cards, you could slash your interest bill to zero by transferring these debts to a 0% card.

0% on new spending

Another handy 0% deal is 'no interest on new spending for an initial period'. Roughly fifty cards offer 0% on new purchases for anything between three and twelve months. In effect, these cards allow you to defer part of your household expenses for up to a year. Over this period, you pay minimum monthly repayments to your card issuer, while putting the remainder (what's needed to pay off your balance in full) into a savings account. Hence, you pay no interest on your purchases and earn extra savings interest into the bargain. Cool!

Try to get 0% for both transfers and spending

Be careful which 0% card you choose. If you spend on a 0% balance-transfer card that doesn't also offer 0% on purchases, you'll start paying interest at the full whack on this spending – up to 25% a year. Since almost all cards (with a few honourable exceptions) put your repayments towards your 0% debt first, your expensive 'purchase debt' will be paid off last. Ouch!

So, if you want to transfer a balance and continue to spend sensibly, make sure that you choose a 'double 0%' card!

Become a 'rate tart'

A few weeks before your 0% deal expires, apply for another 0% card, transfer your balance to your new card, and repeat until your debt is repaid. Well done: you're now officially a 'rate tart'!

However, rate tarting can be challenging, especially when you've built up a substantial collection of cards. At some point, you may run out of 0% card providers, or get rejected almost every time, and then the game will be up!

If you lack the necessary discipline to become a rate tart, or your credit history isn't robust enough to enable you to go 'debt surfing', there is another, simpler option...

> Get a 0% card from our Credit Card centre.

Balance transfers for life

0% deals cost lenders a lot of money. In fact, as this article revealed, these interest-free offers are costing card issuers around a billion pounds a year. This has led to speculation that some providers will withdraw from this market, which I personally don't believe will happen on any significant scale.

In an effort to move away from the 0% battle, a few lenders have introduced 'lifetime rates' for balance transfers. Here is a selection of popular lifetime-rate cards:

Lifetime-rate cards
Credit card	Lifetime rate (annual %)	For balance transfers made in first...	Typical or standard APR (%)	Minimum monthly repayment (%)	Apply via the Fool?
MINT mc^2 (3.9% deal)	3.90	Three months	11.90	2.25
Texaco	3.90	Six weeks	14.90	2	Apply
Tesco Finest Platinum	4.80	Six months	14.90	3
NatWest Gold	5.80	One month	17.40	2.25
Capital One Platinum	5.94	Six months	12.90	3	Apply

There's a simple, yet cunning, way to use these cards to give yourself a long-term, low-cost loan. The cheapest unsecured personal loan that I can find for £5,000 over three years has a typical rate of 5.6% APR and comes from Northern Rock. It charges £150.89 a month (without costly payment protection insurance), which comes to £5,432.04 in total – that's the £5,000 borrowed, plus £432.04 in interest.

However, you could buy something for £5,000 on a credit card and then transfer this balance over to, say, the above Texaco card. Let's keep your monthly repayment the same as the above personal loan, i.e. £150.89, and ignore expensive credit card repayment protection.

According to my calculations, if you didn't spend a penny on this card, but simply repaid your balance transfer, you would make 35 payments of £150.89 and a final payment of £12.12. So, your total amount repayable would be £5,293.27 and, therefore, your interest bill would be £293.27.

So, getting a 'personal loan' via a balance-transfer card with a lifetime APR under 5.6% can be cheaper than choosing the cheapest personal loan. In the above example, you would save £138.77, which is almost a third (32%) of the interest charged by Northern Rock. Nice!

Just one final warning: if you plan to create your own lifetime-rate loan, avoid making these mistakes:

1. Spending on your card. If you do, you'll pay interest at standard rates on this spending (see the rates in the last column of the above table).
2. Buying credit card repayment protection (CCRP). At a typical premium rate of 78p per £100 outstanding per month, this cover will increase the cost of your loan to £6,252.03. In the above example, having CCRP will cost you £958.76 in extra premiums and interest – aaargh!
3. Buying a card protection plan. This is will cost you an extra £15 a year, or £45 over three years. In fact, just cut up your card after you've set up your cheap loan, because you won't need it. What's more, if you don't have a card, you can't lose it and no-one can steal it, so you don't need this cover!
4. Missing a payment. If you miss or bounce a payment, you'll be hit with a fine of, typically, £25. So, set up a standing order or direct debit for your flat monthly repayment. Don't fall into the trap of paying minimum monthly repayments, because this will cause your interest bill to rise steeply.

I hope that this article helps you to become a better borrower!

More: Check out these great credit cards and personal loans.

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