As Westpac explains on its balance transfer page, these deals offer “a low transfer rate on balances transferred for a fixed period of time, after which the interest rate reverts to the variable cash advance rate” or, in the case of some cards, to the standard variable purchase rate. But with introductory offers lasting anywhere from a few months to a year, it is easy to forget about the temporary nature of balance transfer deals.

So what happens when the honeymoon period on your balance transfer card is over? What if you still have debt?

This situation is when things can go wrong because all of a sudden you will have interest accruing on the balance of the card. And with the average purchase rate around 17% and the average cash advance rate closer to 20%, there could be a big spike in credit card charges.

On the other hand, balance transfer credit cards do offer a way out of endless credit card debt without paying a lot of interest in the process. Even ASIC’s MoneySmart website acknowledges the benefits of balance transfer offers, saying”

“You can get the full benefit of this by paying off the balance transfer amount within the balance transfer period. Just make sure you check the interest rate that will apply once the balance transfer period is over.”

But there are all kinds of circumstances that make it hard to stick to this deadline. Whether it is a balance that is impossible to pay off in that timeframe, unexpected expenses elsewhere or another change in circumstances, people often end up left with a balance when rates revert.

This guide is designed to make it easier to deal with credit card debt once the reprieve of lower rates is over so that you can deal with your balance without the interest charges getting out of hand.

On This Page

Introduction

1. Planning ahead with a balance transfer
2. What interest rate is applied at the end of the balance transfer?
3. Calculating credit card balance debts (again)
4. Budgeting for repayments
5. Considering another balance transfer?

Other ways to deal with ongoing credit card debt

Planning ahead with a balance transfer

The best balance transfer credit card scenario is one where you pay off the debt before the end of the honeymoon period. The easiest way to do this is to make repayments that will help you pay off the balance within the honeymoon period so that you never have to deal with a higher interest rate.

For example, if you wanted to transfer a $3000 debt to a card with a balance transfer offer of 0% for 12 months, you could pay $250 per month ($62.50 per week) and be debt free within the honeymoon period. A 0% balance transfer lasting six months, on the other hand, would require a repayment of $500 per month to clear the debt by the end of the balance transfer offer, while a 12-month BT deal with an interest rate of 2.99% p.a. would mean repayments of $275 per month to clear the debt and cover interest charges for a year.

What all of these examples highlight is how realistic (or unrealistic) it is for you to pay off your balance during the introductory period. Can you make these kinds of repayments on your credit card? What type of balance transfer deal will work best for you?

Choosing the right kind of card could be the difference between paying no interest on your credit card debt and paying a lot of interest when the honeymoon period is over. A good way to figure out the best balance transfer cards and repayments for you is to use a credit card calculator or budget planner like the ones available on the MoneySmart website. That way you can apply for a balance transfer card knowing exactly how much you need to pay each month to get the most value out of it.

Unfortunately the best-case scenarios with balance transfers are not always realistic or achievable. So while it is good to understand the importance of balance transfer budgeting, the following sections are helpful if you find yourself at the end of the honeymoon period with a big balance weighing you down.

What interest rate is applied at the end of the balance transfer?

This question is one often considered at the start of a balance transfer but, by the end of it the answer could be forgotten – or completely different. Credit card issuers have the right to change ongoing rates and card terms and conditions at pretty much any time, so it is a good idea to check these details when the introductory period is coming to an end.

Most of the time, balances will be charged the standard purchase rate or cash advance rate for the card you are using, but it varies between issuers and cards. As of January 2015, the major banks apply the following rates to balance transfers once the introductory period has ended:

• ANZ: Currently applies a standard rate that matches the purchase rate for whatever card you choose.
• CommBank: Charges the cash advance rate at the time the honeymoon period ends.
• NAB: NAB’s balance transfer page explains that: “at the end of the balance transfer period any balance transfer amount that you haven’t paid off shifts onto the purchase interest rate for your card.”
• Westpac: Applies the variable cash advance rate to balances remaining at the end of the introductory period.

Other banks outline the rates they apply either online or in the terms and conditions information for each credit card, so it is worth checking for updated information before the end of your balance transfer period.

All interest rates vary significantly based on the transaction type and card, but checking these details at the end of the introductory period is an important step in figuring out repayments and charges once the standard rate is applied.

Calculating credit card balance debts (again)

Once you come to the end of the balance transfer period, it is important to update your budget to deal with the existing debt and ongoing costs of carrying a balance.

The good news is that the original debt will be less than it was to start with (assuming you have not used the card for anything else). The bad news is that you could end up paying a lot for the remaining balance. How much depends on the debt and the interest rate charged, so let’s take a look at a few different outcomes.

Using the original $3000 debt scenario above as a basis for this example, let’s say you have a remaining balance of $1500, with interest rates reverting to a moderate rate of 17%. It would take another seven months to pay down the debt at a rate of $250 per month and cost you $79 in interest.

In contrast, if the interest rate were 21% (common for cash advances), it would still take seven months to pay off but cost you $99 in interest. And that’s assuming you continue to pay $250 per month off the balance, rather than less (or more), which would also have an impact on the charges and timeframes involved.

In this scenario, if you paid just the minimum on a card with an interest rate of 17%, it would take 15 years and 2 months to clear the balance, costing a total of $1632.92 in interest. Making minimum payments on a card that charged 21%, on the other hand, would see you carry the debt from 20 years and 6 months and cost $2860.64 in interest.

Being aware of these things before the honeymoon period is over, however, gives you a chance to plan for the interest charges and make sure you deal with the debt as quickly and as effectively as possible.

Budgeting for repayments

Whether you have budgeted for repayments during the introductory period, or just paid what you could each month, when rates revert it is a good idea to develop an actual budget for repayments. How much can you afford to pay off the balance each month, and how will interest affect that?

Once again, a credit card calculator is a great tool for figuring this out, but it is also important to consider your income and other expenses. The goal is to come up with a monthly repayment value that is both affordable and realistic, so remember to factor in your other expenses and any unexpected costs when you start budgeting for the remaining debt payments.

In fact, MoneySmart recommends updating your full budget every three to six months “to make sure it reflects your current income, spending and what you want to achieve”. The organisation also says it is important to refresh the budget when there are significant changes, which could include an increase in your credit card interest rate.

Taking the time to update your budget and plan for credit card repayments for the next three to six months (or year, if you feel things are that stable), will make it easier to manage the new interest charges. In turn, that should mean you avoid more card debt down the track.

Considering another balance transfer?

While issuers frown upon people jump from one balance transfer offer to another, it is technically possible to do this and continue to get lower rates as a result. But there are implications for this practise, sometimes known as “credit card churning”.

For starters, every time you apply for a credit card, it is listed on your credit report. The more applications there are (even if they are approved), the more issuers could find reason to reject your application for a balance transfer.

But more importantly, simply moving the balance to a new card is only a temporary solution to the debt anyway. It is much more important and effective to prioritise repayments over the interest rate charged, whether that is with a current card or a new one.

So when should you go from one balance transfer card to another? There isn’t really a “right” or “wrong” time, but there are better and worse times. The two examples above fall towards the latter end of the spectrum, with balance transfers done merely for convenience or opportunism.

A better time to consider a balance transfer, on the other hand, is when the new card will benefit you more even when rates revert. If, for example, your current card has high ongoing purchase and cash advance rates, you could transfer the balance to a card with a low ongoing rate to make credit more affordable for both the short and long term.

The bottom line is this: it is fine to transfer your balance again, just make sure you do it for the right reasons and find a card you are likely to stick with once the shine of the introductory offer ends.

Other ways to deal with ongoing credit card debt

If you still have a big credit card balance at the end of the honeymoon period, there are several ways you can deal with the debt. Sticking with repayments on the card is the most obvious, but beyond that, you could consider:

• Talking to your issuer about a payment plan,
• Consolidating the debt with a personal loan,
• Adding the debt to an existing loan,
• Using your savings to clear the debt and cancel the card; or
• Seeking professional financial counselling.

The route you decide to take depends on your individual circumstances, but being aware of these possibilities can help you figure out the best way forward.

While everyone likes the idea of a balance transfer credit card, the reality is that it is hard to always get the most out of the temporary low rates they provide. But by being aware of the factors outlined above, and planning ahead, you can make sure you deal with credit card debt once and for all.

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