So, you’ve racked up some debt on your credit cards. What’s the best way to deal with it? While there are many plans of attack for busting credit card debt, you may want to look into applying for a balance transfer card. Offering a period of low or no interest on transferred balances, balance transfer cards could help you pay down that credit card debt faster while saving big on interest.
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.
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.
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.
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.
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.
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.
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.
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.
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.
| 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.
| 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.
|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.
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:
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.
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.
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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