The best credit card for you

Competition is hotting up in the market for credit cards. And with several decent balance-transfer deals out there, that's good news for anyone with small debts they want to pay off, says Ruth Jackson. Here, she looks at the best credit card deals around at the moment.

It may have finally dawned on the nation's politicians that we are in terrible economic trouble the national debt is all but out of control. However, at a more micro level, things aren't as bad as they were.

Why? Because after a year of mediocre credit-card deals, competition is hotting up again. Several new 0% balance-transfer deals have stormed to the top of the best-buy charts. And that is great news for those with small debts they are keen to pay down fast. It means they can shift them on to a 0% transfer credit card and then pay it off in manageable chunks each month interest free.

So which one is right for you?

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The best card for large debts

If you have a large credit card debt that you know you can't pay off quickly, then go for the longest 0% deal you can. Start with the Clydesdale and Yorkshire bank credit cards. These offer 0% interest on balance transfers for 16 months.

The balance transfer fee (the percentage of your debt you have to pay up front to get access to the deal) is 3%, which is fractionally higher than others most are 2.9% but it gives you plenty of time to chip away at that debt. It is also significantly less than the annual interest you will end up paying if you don't move your debt (think 25% plus on a normal credit card).

However, if you know you won't be able to clear your debt in 16 months, consider a 'life-of-balance' deal instead. These credit cards offer a low rate for as long as it takes you to clear your debt. At first glance a 0% deal seems better, but remember the balance transfer fee. 3% might not sound like much but that equates to a 5.6% annual equivalent rate (AER).

So if you are going to pay more than one balance-transfer fee because you have to switch onto another 0% deal, a life-of-balance deal may well work out cheaper. The MBNA Rewards American Express Credit Card offers a rate of 6.7% on balance transfers until the debt is cleared. That is much lower than the rate on the average personal loan, and if you transfer the balance within the first 60 days, there is no balance-transfer fee.

The best deal for small debts

If you only have a small amount of debt that you know you can pay off quite quickly, avoid the longest 0% deals and focus on the balance-transfer fee instead. If you can pay off your debt within six months, then go for the credit card. It offers 0% on balance transfers for six months, with a balance-transfer fee of 1.5%.

If you need slightly longer, try the Barclaycard Gold credit card. It offers 0% interest on balance transfers until June 2011, with a transfer fee of 2.5%. Note that you do need to earn more than £17,500 per year to qualify for this card.

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Next, think about non-credit-card debt. If you have an overdraft, the Virgin credit card looks good. Virgin allows you to transfer money from your credit card into your current account, so you can effectively shift your overdraft onto the 0% card. Given that overdraft fees are high and rising, that is probably a good idea.

A deal worth switching for

Finally, you might look at the Santander Zero credit card. This should work for pretty much anyone you get a 0% interest deal on balance transfers for 12 months, and there is no balance-transfer fee. The catch (because there is always a catch) is thatyou have to have either a mortgage or current account with Santander or Alliance & Leicester to qualify. Still, that's not all bad either. The Santander In-Credit Rate Account pays 5% interest on balances up to £2,500, or, if you tend to drop into the red, the Overdraft Rate Account offers 0% interest on your overdraft for the first year.

Look at it like that and it all makes sense: go with Santander and you can switch to a current account that's in all likelihood better than your present one, and bag a fantastic credit card into the bargain.

Make money out of your debt

Once you have applied for one of the cards recommended above, you should pay off as much of the debt as you can afford to each month in order to clear the debt before the 0% deal runs out.

But anyone prepared to put a little effort in can actually make money out of their credit-card debt. Instead of paying off as much as you can afford each month, just pay off the minimum payment on the card. Put the rest of the money you would have used to pay off the debt into a bank account with the highest interest rate possible (Santander's In-Credit Account that I mentioned above pays 5%). Then, once the 0% deal is about to run out, take the money you've saved up each month and clear the credit-card debt. You've cleared your debt and you get to pocket the interest the money earned in the bank account.

So many people either do this, or talk about doing this now that it even has its own name 'stoozing'. We suspect that it is more talked about than done, given the general admin hassle involved, but if you do have the time to do it you might at least be able to cover your balance-transfer fee with the interest you receive on the savings account. That would make your debt entirely interest- and fee-free no small feat in today's tough credit markets.

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Ruth Jackson-Kirby

Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings and credit cards to pensions, property and pet insurance. 

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping among many other titles both online and offline.