These cards move money from a credit card to a bank account and help you shift non-credit card debts to 0%.
You’re no doubt familiar with 0% purchase or balance transfer credit cards. These can be great options if you need to spread the cost of something really expensive over a few years or to help make it easier to clear card debts.
However, they’re not much help if you’re struggling with things like an overdraft or catalogue debt. The answer instead could be a money transfer credit card.
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What is a Money Transfer credit card?
Unlike a balance transfer card where the money is moved from one credit card to another, a money transfer card lets you transfer the cash into a bank account of your choice.
You pay a fee for this, typically between 3 and 5%. That means if you transfer £1,000 at 3.99%, you’ll pay £39.90 for the privilege. But compare that to the now typical rate of 39.99% you might get charged over a year in an overdraft, you’ll save £359.10.
It’s important you take the money out via a transfer to the account you choose and not just use a cash machine. You’ll only have a couple of months to do this.
As long as the card is also a 0% money transfer card you’ll then have a set amount of time to clear the debt from the credit card without any extra interest charges being added on top.
Why you shouldn’t transfer money on a standard credit card
If you aren’t using a specialised money transfer credit card you’ll get hit with all sorts of extra charges. That’s because withdrawing money on a credit card or using as if it was cash to clear a debt will be regarded as something called a “cash advance”.
The only exception is with a specialist travel credit card like the Halifax Clarity card which allows you to withdraw money from a cash machine without extra fees (though you will be charged interest on a daily basis).
How money transfer cards can save you money
Obviously you can use the money for all sorts of spending and debt clearing, but I think these cards are most useful in the following situations.
Clearing your overdraft
So many people treat overdrafts very differently to other debts – they might not even think they’re borrowing money at all.
But changes this year will see most overdrafts start charging around 40% in interest, making it one of the more expensive debts available.
There are a handful of 0% overdrafts available, with Nationwide’s FlexDirect account offering that rate for just one year.
But if that’s not enough to cover your overdraft, or you can’t get it, then a money transfer card gives you the option to transfer in money and hopefully wipe out that overdraft.
You still have the same debt to clear but now it’s on a credit card and you’re not getting charged any interest.
Clearing catalogue debts
Many catalogue debts don’t even come from a catalogue any more! Instead you’re getting credit to buy straight from a website. Places like Very and JD Williams.
These often start out at 0%, but hit hefty rates if you don’t clear the balance before the 0% period finishes.
It’s worth checking, but most of these services won’t let you clear your balance using a credit card. If that is the case it rules out using a 0% purchase credit card.
If you can use a credit card it does mean you’ll be able to clear the balance to a card without the transfer fee.
But if cards aren’t accepted the Money transfer card is a great alternative. even though you’ll be hit with the fee of 3 to 5%.
How money transfer cards could make you a profit
The term “stoozing” is something I first heard from my time at Money Saving Expert and it’s essentially where you get the money from one of these transfer cards and put it in a savings account to earn interest.
In theory, this is a great hack for those good at keeping track (it’s similar to what I did with some of my student loans in the late 90s). You’re borrowing for free and making money on it.
However don’t forget there’s a transfer fee (usually between 3 and 5%). And since interest rates on savings are so poor right now you’ll struggle to find a rate better than what you’ll pay on the money transfer.
The only viable cash saving account is the same Nationwide FlexDirect mentioned above which gives 5% for a year on up to £2,500.
Even if you get a transfer fee of 3%, the real interest rate you’ll earn is 2%. Better than most standard accounts at the moment but I don’t think it’s worth the hassle.
What to bear in mind
Unlike 0% purchase cards and some 0% balance transfer cards, all money transfer cards come with a transfer fee. Factor this into the cost and potential savings you’ll make.
The 0% length
If the card is advertised as “up to” x number of months then you might be offered a card with a shorter interest-free period.
The size of the credit limit
There’s also no guarantee you’ll get a limit that’s the same size as your existing debt. You could look at more than once card in this situation, though bear in mind you will need to be credit checked (more on that in a bit).
The size of your debt
On the other hand if your debt is relatively small (perhaps you’ve been working hard to clear it), and at the lower end of overdraft or catalogue interest rates then that transfer fee might not be worth it.
For example, if there’s £200 left on your debt at 19%, and you know you can wipe it out in two months, you’ll pay just under £13 in interest. Meanwhile a card which charges 5% for a transfer will cost £10 in transfer fees. Yes a saving, but possibly not worth it.
How you apply
As with any credit card application, it’s really important to go what’s called a “soft check” first. This will give you an idea of your chances of getting the card in question. More on this here.
How you’ll clear it
You’ll need to at least make minimum payments every month to avoid fees or losing the 0% offer.
Really it should be higher so the debt is wiped during the time you’ve got 0%. So £1,000 over 18 months would be £56 a month.
And it’s even better if you pay off more, usually as much as you can each month, and clear it as fast as you can. I’ve written more here about ways to quickly clear credit card debt.
I mentioned above how a 0% purchase card is better for any big spending you’ve got coming up that you want to spread the cost of, but that’s not your only option.
If you have savings, use those to clear your overdraft, catalogue or other high-cost loans. This option is something many people overlook or are frightened to consider.
So unless you’re earning interest on those savings at a higher rate than the transfer fee, using savings will allow you to avoid the fee, making it a cheaper option.
And if there is an emergency that comes along later, you can look at a 0% purchase or transfer card to help you manage.