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I have some credit card debt that is currently on cards where there is 0% interest for periods of between 14-22 months. There was a transfer fee of around 2.9-3.5% for the balance from old cards.

I originally intended to pay off these debts at the end of the 0% periods with the money I'm earning and saving. However, given that interest isn't being applied and the transfer fees are close to the rate of inflation in the UK, I'm wondering if I should just transfer my balances to another 0% card at the end of the offer periods and use my savings for something else?

What are the advantages and disadvantages to me in doing this?

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Background reading: stoozing.com/stoozing-guide.php –  AakashM Nov 19 '12 at 10:22

2 Answers 2

Unless you can have your savings earning more than the transfer fees, you should just pay the credit cards off before the interest free period ends. Also, there is the difficulty in finding new cards offering 0% interest continuously.

You are better off paying off all your bad debt as soon as possible, start saving and investing, instead of wasting your time and energy trying to find new offers of 0% for your transfers before it expires.

Rule of Thumb: Get rid of your Bad Debts as soon as possible; Keep your Good Debts as long as possible (as long as you can afford them).

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+1 I trust you define "bad debt" as the 10%+ credit card debt, and "good debt" as the lower rate debt such as mortgage which may be zero after taxes and inflation are factored in. (you guys get to deduct mortgage interest off your income for taxes?) –  JoeTaxpayer Nov 18 '12 at 2:48
    
@JoeTaxpayer, we get to deduct mortgage interest only on investment properties not on the house we live in. But then we don't pay any capital gains tax when we sell the house we live in either. The asset has to be income producing for us to be able to claim a deduction for the interest. Yes, basically bad dept is any kind of consumer dept where what you buy goes down in value, while good dept is generally associated with assets which generally go up in value over the long term. –  Victor Nov 18 '12 at 6:55
    
But if interest isn't being charged, for the life of the offer the debt is shrunk (taking in to account inflation), isn't it? For the fifteen minutes or so to find a new 0% offer and apply for it, it doesn't seem particularly onerous. At this rate, it would count as 'good debt', wouldn't it? –  James Nov 20 '12 at 19:43
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@James, you are still being charged the transfer fee each time. I have had some 0% balance transfers here in Australia but with no transfer fees. And I wouldn't want to get stuck with an endless number of credit cards, and that is if you are able to get approval for a new card each time. You end up playing a risky game of keeping track of all your cards and worrying about credit card theft. I think in all it would take a whole lot more than 15 minutes to get approval for each additional card. You are better of spending your time in earning more money or investing your money. –  Victor Nov 20 '12 at 22:53
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James, it's difficult, if not impossible, to keep this up indefinitely. In the States, getting new cards impacts one's credit score, and at some point, you will have too much available credit. It's a good tool to lower your cost along the way, but it's best to work toward paying your debt to Ero and getting out of thus cycle. –  JoeTaxpayer Nov 23 '12 at 4:33

Remember that balance transfers are rarely fee free. As you state, there is a fee associated with the balance transfer. If your 0% rate is for 18 months and the fee is 3%, you are really paying 2% per year on the amount you transferred.

The advantage is that you can redirect the debt you transferred is interest free and you can attack other debt with high interest on it. This can save you in interest fees and allow you to direct more of your money towards debt. The disadvantage is that your 0% interest will expire and become a much higher interest rate. Unless you pay off the transfer before the expiration, you will have to pay off the debt at the higher interest.

How you decide to attack your debt reduction may need to factor in how long you expect to have debt and what other debt you have. Often times though, the savings in interest is less important than simplifying the number of debt accounts you have. The inspiration you receive from reducing your debt accounts is much more powerful. You realize reducing debt accounts allows you to actually see an end in sight and provides the recurring positive feedback that you are making progressing. This is why the advice to pay off your lowest balance credit cards first.

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