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Interest Free Credit Cards – What are They and How Do They Work?

in Credit Cards

Like most things in life, even interest free credit cards are not quite free, but they do offer an opportunity for people who need a little extra cash, or those with debt on high interest credit or store cards, to consolidate that debt at a much lower rate. There are two main types of interest free credit card: a card which charges 0% on balance transfers and a card which charges 0% on spending. Some cards offer a 0% interest rate on both spending and balance transfers.

If used properly, interest free credit cards are the cheapest way to borrow money, offering extremely low rates over a period of up to 22 months, depending on the card provider.

Choosing the type of card to suit your individual needs is a matter of making a sound financial decision based on why you need the money and how you intend to pay it off. It can be easy to build up an unnecessary amount of debt spending on a credit card, with the promise of a distant deadline to repay the money; however, this can soon lead to an unmanageable debt if not properly monitored.

However, it makes financial sense to use an interest free card to pay off existing debts, as it will likely be cheaper than any other type of loan, including, in many cases, a mortgage loan. It’s important to always meet at least the minimum payment every month, or the interest free deal will be withdrawn and the interest payments will revert to the standard amount. Set up a direct debit to avoid losing your deal.

Most companies charge an upfront balance transfer fee for the amount of debt moved. This varies depending on the card provider, but between 3% to 5% is standard. Cash shifted from a current account to an interest free credit card deal is usually charged at a slightly higher rate. Check the small print before proceeding, and be aware that most cards only allow you to transfer 95% of the credit limit.

Which card to choose also depends on the amount of debt, your credit score and how much time you require to pay it off. Many people like to get rid of debt as quickly as possible, but a card with a long 0% deal allows you to spread the payments over nearly two years, meaning if other financial issues crop up you have plenty of room for manoeuvre.

Another option is to move the debt to a new card at the end of the interest free period. People who do this are affectionately known in the business as ‘card tarts’ – moving debts between a series of zero and low interest deals to avoid having to pay much higher rates of interest on bank loans or existing credit card debts.

The current crop of 0% credit cards last for longer periods than ever before, so shop around to take full advantage of the best deals on offer. Using interest free credit cards is a financially savvy way to cut debt and save money.