FOOL'S EYE VIEW
How To Use Your 0% Credit Card

By Jane Mack (TMFJane)
July 21, 2005

Do you realise it's nearly forty years since the first credit card was introduced in the UK? Now there are more than 1,500 versions to choose from, although the companies behind them only number about 30.

More to the point, can you remember what interest rate you were paying on your credit card even five years ago? It was probably in the region of 15% to 20% as interest-free introductory deals had yet to be invented.

Used sensibly, these 0% introductory rates mean that we can now use credit cards as a tool for getting out of debt reducing mortgage costs or even for making money. Here's how:

Getting out of debt

If you've got debts on your credit card or overdraft then you're probably paying quite a high rate of interest on them (overdrafts can be particularly expensive). Unless you've got a truly horrendous credit record, you should find that you qualify for an introductory deal that will enable you to transfer those debts to a 0% credit card.

Transferring balances that are incurring interest to an interest-free card means that all of your subsequent monthly payments will go towards clearing the debt and much more quickly too. However, make sure you think it through first before making an application for one of these cards:

• What does the offer apply to? Balance transfers? New purchases? If there's no introductory offer for new purchases then don't use the card to buy things. The chances are your new purchases will be subject to a higher interest rate and they'll be the last charges your payments will be applied to. That means that your payments won't touch the new charges until your original balance transfer has been paid off.
  
  
• Check how long the 0% rate lasts - the longer the better.
  
  
• Be diligent about paying your bill. Make at least the minimum payments - preferably more than the minimum - on time. Be scrupulous about it or you'll very likely lose the introductory rate as well as being clobbered with late payment fees.
  
  
• If you are likely to have a remaining balance once the introductory rate expires, transfer it to a new interest-free credit card in the same way as you did before. Make sure you line up the new card in plenty of time as it can take a few weeks for your application to be processed.
  
  
• Close down old credit card accounts as you go - otherwise your credit report could show you as having 'too much' available credit. The evidence that you had the credit card will remain on your credit file for six years but at least prospective lenders will know that the account is defunct.
  
  
• If you plan to continue switching between cards, make sure you know which companies are behind them. Don't, for example, try to balance transfer from a Halifax credit card to one with the Bank of Scotland - they're the same company and you'll get turned down which won't make your credit file look good.

Reducing your mortgage costs

If you've got an offset mortgage you could use it to offset your mortgage for the duration of the introductory period. Borrow as much as you can through a 0% interest credit card deal; put those borrowings towards offsetting your mortgage for the duration of the 0% credit card deal and, at the end of it, withdraw the relevant amount and pay back the card or, alternatively, have a new 0% deal lined up. It's cost nothing to borrow the money but it's been used very effectively to reduce your mortgage costs. (It's also possible to put the balance from a card into a savings account and earn money from that. However, this is less profitable after you take off income tax and because of the 2% balance transfer fees that many cards charge these days.)

A warning though! There are big risks with this. You absolutely have to have the right personality for it and be on the ball the whole time. You'll probably take on a lot of 'debt' which could harm your credit rating (prospective lenders don't know that you've got the money safely tucked away) and this may impact on you if you later need to borrow money for something really important. You also need a 0% credit card that allows you to effectively get the amount you borrow directly into a bank account either as a balance transfer or by a fee-free credit card cheque.

Above all, you mustn't spend any of what you've borrowed, you mustn't miss a single deadline and you must make sure that if you're switching between cards that your applications get approved in time. In other words, you need to be an absolute control freak because there is huge - HUGE - potential for getting into serious trouble!

Using 0% credit cards to help get yourself out of debt is a no-brainer and you should take full advantage of it. Using them to reduce your mortgage costs can be hazardous so think very carefully before you embark on it.

> Find your perfect plastic in our Credit Card centre.