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Are Balance Transfers Still Worthwhile?

There was a time when there where only two real features that people compared when choosing a credit card. The first one, the standard APR, was the most basic in that a lower rate was almost always desirable. The second was the interest free balance transfer deal, where you could move your debt from a bank account or other credit card, and not have to pay any interest on it for the period of the introductory deal, which tended to be around 6 months.

Following the introduction of balance transfer deals, savvy customers soon realised that it was possible to avoid paying interest on their debts almost indefinitely, by repeatedly taking out a new 0% card and transferring their balances to it before the introductory period ended on their previous card. This activity, known as credit card surfing, became extremely popular, and the people doing it became somewhat unflatteringly known as 'card tarts'.

This avoidance of interest was obviously not very good for the credit card companies' bottom lines, and as competition in the market led to ever longer introductory deals, it was estimated by some that the industry as a whole was losing around a billion pounds a year in uncharged interest, and so something had to be done to preserve the issuers profits. The credit issuers responded by introducing a balance transfer fee, where a small percentage of the balance transferred was charged back to the account. Originally, the average fee was around 1%, but over time it has grown to in some cases 3%, and is expected to net the card issues a total of Â£459m in 2007 alone.

There was also generally at first an upper limit to the amount charged of around Â£50, but now most if not all card companies have removed this fee cap.

These balance transfer fees have taken quite a lot of the steam out of the balance transfer market, as it is now no longer possible to transfer your debt for free - in fact, for larger debts, the fee can run into hundreds of pounds. So is it still worthwhile to take advantage of 0% balance transfer deals?

The answer is, largely, still a resounding yes. Even with the fee now often at 3%, the period of many balance transfer cards is now a full twelve months or more, making the cost of the debt you transfer on to them effectively equivalent to 3% APR. Compare this to the normal APRs found in the credit card market, usually in the area of 15% or so, and transfers still seem like a good deal. Even compared to personal loans which can have rates as low as 6%, balance transfers can still make sense if you have a sizeable balance and no realistic prospect of clearing it in the near future.

Although we're unlikely to ever return to the days of completely free credit - the card issuers have learned their lesson on that one - taking advantage of a long 0% transfer deal will still see you come out ahead compared to most other forms of credit, and so is still well worth considering.

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Michael writes for the credit cards UK site Card Sense, where you can compare cards with 0% balance transfers, as well as reading more articles on credit.

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