Protect yourself from balance transfer disaster

People are paying far more than they think for 0% balance transfer credit cards. Only 4% of people are able to work out what a deal will cost them, with the vast majority of people underestimating the expense. Fortunately there are five golden rules that will keep you out of the 0% balance transfer credit card traps.

Which? has asked the Financial Conduct Authority to look into the 0% market, after it asked people to work out the cost of putting a £2,400 debt onto a credit card with an interest-free period of 25 months and a balance transfer fee of 1% (assuming the debt was paid within 24 months). Only 4% worked out that the balance transfer fee would cost £24. Shockingly 68% of people thought the transfer wouldn't cost anything.

If you fall into this trap, clearly you are going to end up stung for fees you weren't expecting. And while it may end up the cheapest way of repaying the debt - despite the fees - this isn't the set of thing anyone should wander into with their eyes closed.

Fortunately there are five steps you can take to ensure you know what you're getting into with a 0% balance transfer credit card.

1. Start with the transfer fee

You might be focusing on the interest-free period, but you need to pay close attention to the transfer fee too. Find out what it is, and do the maths to work out what the transfer will cost you.

There are some cards available with up to 40 months interest free, but they come with a hefty fee. Consider whether you could pay off the debt a bit quicker than this, and manage on a card offering 24 months free - charging a much lower fee.

2. Consider your credit score

Nicolas Frankcom, money expert at uSwitch.com warns that not everyone will qualify for the cards with the longest interest-free periods - it depends on your credit score. He explains: "Before you apply, it's worth finding out what your credit score is, so you don't apply for a card that may not be suitable – this can have a negative impact on your credit score, and further hamper your chances of getting a better deal."

3. Pay the money back

The purpose of a balance transfer should be to clear the debt before the end of the interest-free period. There is a chance you may be able to switch to another card when it runs out, but there are no guarantees, so if at all possible you should avoid taking this risk.

If you're not blessed with much self-control, you should work out what you need to repay each month to clear the debt, and set up a direct debit to repay it. If you are more confident about your self-control, instead of paying this cash back to your card provider, you can switch it into a saving account at the start of each month - before you have a chance to spend it - so you'll earn some interest on it too.

4. Don't spend any more

As Frankcom puts it: "If you find yourself spending on it as well you can quickly see your debt spiral, and any spending you fail to clear will be charged at a higher rate." He points out that some cards offer 0% on spending and transfers, so may be a sensible option for people trying to manage their finances.

However, you need to ask yourself whether you can clear the balance, and any new spending before the interest-free period expires, or whether you are building up problems for later.

5. Shop around

You can't transfer a balance between two cards issued by the same provider, so you'll need to check the market for the best deals. uSwitch points out that at the moment there are several cards to choose from.

The longest interest-free period at the moment is from Virgin - offering 40 months - and a 4% fee for transfers. There are also some offering fee-free transfers, including the Tesco Clubcard Credit Card, which runs for 19 months and allows transfers without charging a fee.

Credit cards on AOL Money

Banks promise compensation for mis-sold credit card protection

Singletons dangerously naive over partner's debts

Store cards "a complete scandal"