Hidden costs of 0% balance transfers

Consumers lured to a credit card with zero per cent interest on balance transfers could find themselves out of pocket unless they read the small print, analysts warn today.

A new report from Moneyfacts.co.uk finds that although headline offers may look good, users should check out a whole range of factors before signing up to a new credit card.

Introductory offers and balance transfer deals are attractive if you have some debt to transfer, but if you plan to use the card for purchases as well, the report warns it is also important to check the small print the order in which you pay these off.

Andrew Britchford, credit card analyst at Moneyfacts.co.uk, warns that the repayment order could see consumers paying off their balance transfer within the interest-free period instead of any purchases – and therefore accruing high rates of interest.

He cites as one example the Capital One platinum card, which is on trial at the moment, and offers a market-leading 15 months 0 per cent on balance transfers.

However, one of the conditions is that the user spends £100 on purchases before July 1st, and the repayment order means that when they repay the £100 on the next statement, this actually goes towards repaying the balance transfer.

As a result, the £100 purchase remains on the credit card, accruing interest of 15.9 per cent until the combined total of the balance transfer and balance is fully repaid, providing there are no other purchases.

"This may only seem a small amount, but when paid by all customers and sometimes on much greater amounts, it will soon mount up. Combined with an uncapped two per cent balance transfer fee, this is a potentially lucrative area for lenders," Mr Britchford said.

He stressed that Capital One is "by no means" the only providers to apply repayments in this order – only HSBC, Nationwide BS and Liverpool Victoria repay the most expensive items first.

"Consumers should take the time fully to understand the deal they are entering into. With so many cards available on the market, they should find a deal which matches their spending needs," he said.

"Trying to avoid mixing card usage, and keeping separate cards for purchases and balance transfers will enable consumers to maximise their savings."