Whether it be a large cash purchase or racking up debt on an overdraft, a money transfer credit card can be useful. But is it the best form of credit on the market? Below we have explained what a money transfer credit card is and what you need to look for when opting for this form of borrowing.
In brief, ordinary credit cards allow you to buy goods and services using your lender’s money. There is then the expectation that whatever you spend will be paid back in full, plus any interest owed.
Money transfer credit cards work according to similar principles. You are lent money which is deposited straight into your bank account. This can then be spent how you wish, with any outstanding debt incurring an interest charge.
When applying for a money transfer card you will be given a credit limit. You can then choose to move all or some of this money into your bank account to make cash purchases or pay off existing debt.
Due to its structure, this type of borrowing is often favoured by two different sorts of consumers:
Money transfer credit cards are not to be confused with balance transfer credit cards. Balance transfer credit cards allow you to move your credit card debt under a single account, and therefore one interest rate. Money transfer credit cards work similarly, except they move your debt from your bank account to your card.
Money transfer credit cards almost certainly carry one-off fees, which will likely be a percentage of the money transferred to your bank account. This is usually between 3% and 5% but some cards don't charge a fee for this at all.
The next detail you should look for is the interest charged on your balance. This is why it is important to look out for a 0% money transfer credit card. Like a 0% balance transfer card, this allows you to use your borrowed money at a 0% interest rate for an introductory period. Once this period has expired, whether it be a month or a quarter, your outstanding balance will be subject to an interest charge.
If you can find a 0% money transfer card then this is when you should compare it to a loan. Credit card rates are typically higher than loans, but if you can clear your debt during the 0% introductory period then you will not need to pay any interest on your credit.
Like all credit cards, it is important to use these cards responsibly. While there are no fixed monthly payments, you are encouraged to pay your credit card in full each month, but you must meet at least the minimum repayment. Not doing so will adversely affect your credit score and make it harder for you to access any form of borrowing in the future.
One of the greatest benefits of a money transfer card is that it can be a cheap form of borrowing, as long as you find the right deal. Not only could you benefit from a 0% introductory rate, but you will also benefit from no early repayment charges.
This means that if you decide to pay off your entire balance then you will not face any extra fees or penalties.
Just as this can be a cheap form of borrowing, if you choose the wrong deal it can end up being one of the most expensive forms of credit on the market. Once you combine money transfer fees with a rate of interest it can suddenly appear more expensive than other forms of borrowing, such as a personal loan.
This means if you need to borrow a large amount of cash then it might not be the best form of borrowing.
If you are looking for a large cash purchase, or trying to consolidate debt, it may be worth considering a personal loan. In essence, this allows you to borrow a set amount of cash which is paid back in set instalments. This means, assuming you make all your set repayments, you will know with certainty how much your interest will cost.
Due to its structure, you will also likely be allowed to borrow more than a Money Transfer Credit Card. To find out what you can borrow, and what rate of interest you will receive, speak to our preferred broker, Loans Warehouse.
Stoozing is where you use borrowed money to earn interest off a savings account. Typically, you would find a Money Transfer Credit Card with a 0% introductory purchase period and use the borrowed cash as a deposit in an easy access account. Before your 0% introductory period ends, you then pay back the original borrowed cash and pocket the interest earned.
Before you decide if this is a worthwhile scheme, it is essential to consider all the risks and to read the terms and conditions of your savings account and credit card with attention. If not, you could face a significant amount of debt and a damaged credit score.
In addition to this, it is worth considering if the interest is worth the risk. As mentioned, some Money Transfer Credit Cards carry one off transfer fees. Even with a 0% introductory purchase period such a fee could exceed or significantly eat into any interest earned.
For more information on the risks associated with stoozing, read our guide.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.