Balance Transfers 101
Let’s start at the very beginning. Balance transfers, in essence, are a simple concept. You transfer a balance from another credit card onto a new credit card to enjoy a much lower rate of interest on that balance for an introductory period. This allows you to save on interest and potentially pay off your debt faster.
Simple, right? Unfortunately, there’s a bit more to consider when dealing with balance transfer cards. Yes, they can be awesome tools for busting debt and avoiding interest, but they must be dealt with correctly. You need to know how to find the best balance transfer card – and how to use it. Luckily, it just so happens that we have that know-how – and we’re willing to divulge it.
Balance Transfer Benefits: The Big 4
What can a balance transfer card offer you? That is a good question. Why bother applying for a new card if it’s not going to benefit you, after all? Let’s run through the four main advantages of applying for a balance transfer credit card, so you can see whether this type of card could be of benefit to you.
Reduce the amount you pay in interest
It’s no secret, credit card providers make money off the interest they charge. Credit card interest varies according to the card, with basic cards generally charging less in interest, and premium cards with high-end features and rewards charging more in interest. If you clear your balance every month by the statement due date, then the card’s interest rate is unimportant.
However, if you carry a balance, then you are more than likely paying interest on it. Even with a low rate credit card, carrying a balance can get expensive. If, on the other hand, you have a credit card with an interest rate on the wrong side of 20% p.a., that interest could really stack up, making it harder and harder to pay down the overall balance.
Which is where a balance transfer card could come in handy. If your credit card debt is making your eyes water, it may not be the best idea to leave it sitting there on a high interest credit card. Especially if you are only paying the minimum repayment each month. By transferring it to the right balance transfer card, you could save heaps in interest.
Repay your debt sooner
Paying less in interest has the knock-on effect of allowing you to pay down your debt faster. It makes sense. If you are paying less in interest, you can pay off more of what you owe. So, instead of staying in debt, by working hard and being smart with your cards, you should be able to clear your debt sooner.
Consolidate your debt
If you have a number of credit cards, that also means you have a number of credit card bills and monthly due dates. For some people, having numerous debts can be overwhelming. By choosing the right balance transfer card, you can consolidate your card debt so you only have one credit card bill and only one credit card repayment to worry about.
Yes, it will still be the same amount to pay off overall, but with a balance transfer offer, you should be paying less in interest on that overall bill. That means you can concentrate on clearing your total balance, and paying it off before the introductory period ends. Of course, there are factors to consider here, and we’ll get to them shortly.
Get a better credit card
Not all credit cards are created equal. And not every credit card is suited to every credit cardholder. Finding the right credit card is something of an art form – something that CreditCard.com.au is here to help you with. If you have the wrong credit card for you, you could benefit from finding a balance transfer card that suits your needs better.
Busting your Credit Card Debt
Now you know the benefits of a balance transfer card, let’s look at what else a balance transfer card can offer. After all, a balance transfer card is simply a credit card with a balance transfer offer. That means balance transfer cards can come in all shapes and sizes, some with low fees and low rates, some with higher fees and interest and more features.
Aside from its balance transfer offer, a balance transfer card could be combined with other types of offers. You may be able to save money with a reduced annual fee offer. You could save on interest on purchases with a purchase offer. If you opt for a rewards card, you could benefit from a number of bonus rewards points.
In terms of the type of card you choose, this could be a low rate card or a card with a low or no annual fee. You could choose a rewards card or frequent flyer card, or you could opt for a premium card, such as a platinum card. Features on offer could include complimentary travel insurance, hotel stays, travel credit and more.
But, you have credit card debt you want to pay off. How much do all of those extras matter? When you have a chunk of debt to pay off, and you decide a balance transfer card is the best way to do that, it’s usually a good idea to focus on the balance transfer offer over everything else. The extras may be nice, but money-saving should be the main priority.
Want to know how much you could save by switching to a balance transfer card? Using a balance transfer calculator could give you a good idea. Say you have a balance of $3,000 on a card with a purchase rate of 20% p.a. If you switched to a 0% p.a. balance transfer card and paid off that balance within a year, you could save $526 in interest on that 12 month period.
Balance Transfer No-Nos
Not so long ago, ME Bank completed a survey (1) of more than 2,000 credit card holders to uncover more about balance transfers and the way in which customers were using them. According to the survey, around 40% of participants said they applied for balance transfer cards specifically for their balance transfer offers.
However, the survey also found that 29% of all balance transfers weren’t cleared before the interest free period ended. Why? The bank found that these cardholders weren’t changing their spending habits. In fact, 53% of those who accepted 0% p.a. balance transfer offers continued to revolve their debts on a regular basis, compared to 37% overall.
A balance transfer card only works if you make it work. Transferring that balance onto a new card doesn’t make it disappear. It’s doesn’t mean you have the green light to start spending on that old card now that the balance is conveniently somewhere else. If you want to make your balance transfer card work for you, here are some of the biggest no-nos you should avoid.
- Only paying the minimum: Paying the minimum repayment each month will mean you stay in debt for longer. It’s almost certain you will not clear your balance by the end of the introductory period, and that transferred balance will revert to the card’s purchase rate or cash advance rate, leaving you right where you started before the balance transfer.
- Racking up more debt on cleared cards: When you clear the balance on a card by transferring it to a balance transfer card, it can be tempting to start spending on it again. Bad idea. If you spend more on that card, you will have to pay off that balance plus the transferred balance, making it even harder to get out of debt.
- Not paying off the balance by the end of the intro period: Balance transfer periods can last anywhere up to 24 months – and sometimes longer. This can seem like a long time, making you lax in paying off the transferred balance. Before you know it, that intro period is over and your balance starts accruing interest at the card’s much higher revert rate.
- Choosing a card for its features and rewards: When you get a card with heaps of features and rewards, it’s likely to have a higher annual fee. That annual fee could have been spent paying down your balance. Similarly, using a card to earn rewards means increasing the amount you have to pay off: the new balance plus the transferred balance.
- Spending big on the new card: New card, new temptation to spend. However, when you spend, you should understand how your payments are allocated. When you make a payment, the card provider automatically puts that towards paying off the most expensive debt first. If you have made new purchases, they will accrue interest at a higher rate than the transferred balance, meaning they will be paid off first. Even if you think you are chipping away at your transferred balance, you may in fact, only be paying off those new purchases.
- Failing to understand the card’s terms and conditions: There’s no denying it. Credit cards come with a lot of small print. It can be all too easy to gloss over those boring terms and conditions. For example, you may think that you are benefitting from up to 55 days interest free on your new purchases. But, for many cards, if you have a balance transfer, that interest free period does not apply.
- Creating revolving debt that’s never paid off: You get one balance transfer offer, but fail to pay off the balance. You take out another balance transfer offer when that one ends, but you fail to pay that off as well. You create a revolving cycle of debt that is never paid off, and you stay in debt for years.
Making Balance Transfers Work For You
Okay, okay. That was quite a lot to take in, but don’t let it put you off. While there may be quite a few balance transfer no-nos, there are some simple rules to follow that can make a balance transfer offer work for you. A balance transfer can be an awesome tool, but you need to know how to make that tool work for you and your credit card debt.
Before you apply
- Choose the right card: Just as you would with any other credit card, you have to compare balance transfer cards to find the one that works best for you. Consider choosing a balance transfer card with a low or no annual fee, and focus on the balance transfer offer above all else.
- Choose the right offer: There are heaps of balance transfer offers out there, but the key is to pick the right one. A 0% p.a. balance transfer is usually best. Try to choose an intro period that will provide sufficient time for you to clear your transferred balance.
- Understand fees: In most cases, you will have to pay a one-off balance transfer fee. This will usually be a percentage of the transferred balance, and will be added to the total amount to be paid off. Take this fee into account when working how much the balance transfer could save you overall.
- Understand transfer limitations: Your credit limit will be determined by the card provider when you apply for the card. However, you may only be allowed to transfer a balance up to a certain percentage of that credit limit. This can range between 70% and 95%.
- Know what happens at the end of the intro period: Find out what rate the transferred balance will revert to at the end of the introductory period if you fail to pay it all off. Choosing a card with a lower revert rate could be a good idea if you think you may have trouble clearing your debt before the offer ends.
Using the card
- Consider your spending: As we explained before, when you make a payment on your card, that payment will go towards paying off the most expensive debt first. On a balance transfer card, that will usually mean payments go towards paying off new purchases before balance transfers. Think about whether you can afford to pay off all that new spending while also paying down your transferred balance. You may consider not spending on the balance transfer card at all, and using another card for day-to-day spending until you pay off the balance transfer.
- Consider rewards: Rewards cards reward spending, which, as we’ve already mentioned, is not always a good idea on a balance transfer card. Think about whether rewards are a priority, or whether you want to focus on paying down your transferred balance first. Working on building your rewards points balance could be better left to afterwards.
- Understand your card: Reading the small print may be tedious, but it will help you better understand your credit card and its balance transfer offer. This may involve understanding how your payments are allocated, or how your interest free days work. Interest free days can provide a great way to save on interest on purchases, but they may not be available until you clear your balance transfer.
Repaying the balance
- Focus on repaying the transferred balance: Don’t fall into the trap of only making the minimum repayments. Create a budget to work out how much you can afford to pay back each month, then, look at the length of the balance transfer offer and your total debt. If possible, pay off an equal amount each month so that your total balance is cleared by the end of the intro period. Setting automatic repayments after payday can provide an easy way to pay without you having to put in too much effort.
Last year, Rebecca spent $10,000 on her credit card, taking a trip, buying a new holiday wardrobe, and buying herself a few little treats. She didn’t want to stay in debt forever and knew a balance transfer card could help her save on interest while she cleared that balance.
Rebecca worked out she would need a little over a year to clear the balance, so chose a card with no annual fee, with a 0% balance transfer offer over 14 months, and no balance transfer fee. By repaying that debt over the introductory period, she will have saved $2,035 in interest over 14 months.
Time to Compare
Why do credit card providers attach balance transfer offers to their credit cards? It’s certainly not out of the good of their hearts. No, balance transfer offers are designed to entice new cardholders. So, it’s up to you to take advantage of them. That means knowing what’s on offer, knowing what you need, and finding the right card for you.
When you compare balance transfer cards on CreditCard.com.au, here are some of the most important factors to keep in mind to ensure you get the best card and the best offer for you:
- Length of the balance transfer introductory offer: Try to choose an offer that will allow you to clear your debt before the end of the intro period.
- Balance transfer rate: While many options offer 0% p.a. on balance transfers, some offers provide an introductory rate of up to 6% p.a. Use a calculator to work out which offer would work best for you over the introductory period provided.
- Balance transfer revert rate: This is the rate your transferred balance will revert to if you fail to pay it all off within the introductory period. If you think you may not be able to clear your transferred balance, this rate is important.
- Transfer limit: Find out how much you are allowed to balance transfer. This may be between 70% and 100% of your approved credit limit.
- Limitations on transfers from certain providers: Introductory balance transfer offers are limited to new customers. That means you can’t transfer a balance onto a card from your current provider to get that intro balance transfer rate. This may also apply to new cards under one umbrella group, such as Bank of Melbourne and St.George, as they’re both owned by Westpac.
- Fees and charges: Check whether a balance transfer fee will be applied, and how much it will be. In terms of annual fees, make sure that the annual fee won’t exceed your interest savings before you apply. Try to avoid all unnecessary fees, to concentrate on paying off your balance.
A Step-by-step Guide: How to do a Balance Transfer
While it’s important to remember that the process of completing a balance transfer will vary according to the card you apply for, here is what you may expect:
Step 1. Choose a balance transfer card. Now you know what to look for, you can easily compare the options on CreditCard.co.au to find the balance transfer card that will work for you.
Step 2. Apply. With online application on most credit cards, you can usually apply for a credit card in around ten minutes. You will need to fill in all required information regarding your personal details, your employment, and your assets and liabilities. You will also need to prove your identity, usually with your driver’s license. There will be a section on balance transfers. Complete this to provide all necessary information regarding your current credit card (or cards), and the balance transfer amount.
Step 3. Approval. Depending on the card provider, you may receive a response in regards to your approval within 60 seconds, or it may be up to two business days, or longer. With an instant approval credit card, you will receive notification of the application status on your screen after applying. With other credit cards, you may receive notification by email.
Step 4. Debt transfer. Once you have been approved, your new card provider will use the details you provided to process the balance transfer from your old card onto your new card. The card provider will usually provide an estimation of how long this process will take. If you have online banking set up, you can keep an eye on the transfer.
Step 5. Your new card arrives. Your new credit card will arrive in the mail, usually within two weeks. You may be able to set up a PIN online, or this may arrive separately. If you have decided not to use the card for new purchases, you may choose to keep the card somewhere safe rather than in your wallet to avoid the temptation to spend.
Step 6. Close the old credit card account. Whether you close the old card account is up to you. However, by closing the old account you can avoid the temptation to spend on it, plus you’ll no longer have to pay an annual fee for that card. Make sure the transfer has been processed before closing the account.
Wrapping Up Balance Transfers
That’s it. It’s about time to wrap up balance transfers. If you’ve got debt on your credit cards that you’d like to pay off, a balance transfer card could be for you. Be sure to check out the options on CreditCard.com.au and stick to the guidelines we have outlined here, and you could clear that credit card debt in no time.