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A simple guide to balance transfer credit cards

MML

If you’ve watched any TV or listened to the radio, it’s assured you’ve heard of balance transfer credit cards. In the simplest terms, a balance transfer card is a new credit card from a new bank or company. This new company “takes on” your existing balance (or debt) and puts it on the new credit card. There are many advantages to doing this – but also some pitfalls to avoid.

The upsides to balance transfers

It’s quite difficult for a bank or credit card issuer to gain new business, especially if customers are happy with their current product. To entice people over to their bank, they “sweeten the deal” by offering an array of perks. The biggest benefit is a “zero percent” balance transfer interest rate – or something close enough to it.

Instead of the usual 18%p.a. average, you pay zero percent. But be careful – this zero percent interest rate doesn’t last forever. It is a “honeymoon” rate, and will reset to the full rate as soon as that period expires. The zero percent periods usually last between six to 24 months, with an average of 18 or so.

If we added up all the credit card debt in Australia, we owe a huge $32 billion. That’s $4,300 for every man, woman, and child in Australia (according to ASIC.) So let’s crunch the numbers using that as a starting point.

If you owe $4,300 and only make the minimum repayments each month ($88) it would take you thirty years and five months to pay off the total, assuming you made no further purchases. You’d pay $14,500 over that period, $10,200 of it as interest.

So taking the balance transfer seems like the logical step – but is it?

 

Avoiding common pitfalls of balance transfers

One of the biggest mistakes people make in accepting a balance transfer is not paying off the balance as quickly as possible. If you kept paying off the card with minimum repayments, it would still take ten years to wipe out the debt – assuming the zero percent interest period doesn’t expire.

You would have to put in at least $240 a month to wipe the debt out in 18 months, the average rate of balance transfer “honeymoon” periods. That and you’d have to refrain from using your card on any further purchases.

“It’s always a good idea to pay down more on your credit card each month to avoid mounting up debts,” says finance expert and Savvy CEO Bill Tsouvalas. “A balance transfer can be a leg up; but it isn’t a free- and-clear way out.”

Other aspects to consider

Some balance transfer cards might offer rewards and “platinum” memberships. You pay for these rewards by accepting a higher than average interest rate, which means more debt if you use your credit card more often.

You also must remember to cancel your other credit card, so you avoid paying account keeping or annual fees. Some cards also charge a balance transfer fee, so keep that in mind when shopping around for balance transfer cards.

Like any credit product, if you aren’t sure, get help from a financial professional first.

by:
MML
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