Pitfalls of credit card zero balance transfers

Most consumers will appreciate the benefits offered by credit card zero balance transfers. In layman's terms, they offer a free way to avoid paying interest on any outstanding balances you've notched up on your existing credit cards.

As with most matters relating to personal finances, however, it's not quite that simple. The days of banks grappling with each other over who can offer the longest interest-free period are long gone - and as consumers wised up to the prospect of perennial free credit, lenders duly counterbalanced by introducing transfer fees.

To determine whether or not a zero per cent deal is right for you, therefore, the first thing you need to do is calculate the size of the balance transfer fee that you will incur by switching. Most are in the region of 2.5 to three per cent and some include a £50 cap - a potential source of savings for people with outstanding balances of £2,000 or above. You should also factor in the interest rate that will apply when the deal expires, as the most favourable balance fees invariably entail the least desirable post-deal rates.

The next thing to bear in mind is how soon it will be before the special treatment expires and you're forced to choose between paying off your balance; paying out interest; or perpetuating the balance transfer cycle a little longer.

Once again a quick session on the calculator should help you work out which option will incur the lowest fees. For people with moderate debts it's a fair bet the thing to do will be to transfer balance to another credit card - but anyone who's serious about reversing their borrowing habits would be well advised to keep track of how much money they're throwing away every six months or so on transfers. For more substantial borrowers who have little chance of paying off their balances anytime soon, taking out a lifetime transfer card may be the wisest option.

Having worked out the basic sums, the savviest of borrowers will next go on to breaking down the particulars of their debt.

Not only does this afford you a greater understanding of how far into the red you've sunk, but it's also a crucial way of offsetting the notorious 'tiered interest repayment structures'. Under such systems, repayments that have the lowest level of interest will be deducted first while those with the most damaging rates - such as cash advances - linger in your account the longest, accruing hefty interest as you are forced to service more menial debt.

Alongside those immediate considerations, anyone taking out a zero per cent deal should bear in mind the various other terms and conditions that could potentially have an impact on future spending - one of the most crucial being whether you have (or whether you even want to have) a grace period of zero percent credit card purchases.

Spending on plastic without accruing any interest has an obvious, unquenchable appeal to many consumers. But as someone who is already researching the best zero per cent deals, you'll no doubt be only too aware of the dangers of cosying up to your credit card too often…