Balance Transfer Credit Cards
Balance transfer credit cards have become an excellent means of credit card debt reduction due to how easy it is to consolidate multiple credit card debts on them. As balance transfer credit cards normally only allow balances to be transferred with application, it is quite a straightforward process that can stop debt from building up for many months.
Many balance transfer credit cards offer a lower than usual rate for a long period of time, but there are also quite a few which provide an interest free period for transferred balances that can last for as long as six months. For credit card users who are prepared to spend a small period of time dedicated to reducing their credit card debt this can be an invaluable tool.
A trap that some people fall into with regards to balance transfer credit cards is that a few institutions charge the cash advance rate on balances that still remain at the end of the balance transfer period. As this interest rate is routinely higher than the purchase rate this can make certain debt situations worse than before the balance was transferred. Another problem with balance transfer credit cards is that users are generally forced to pay off the balance entirely before they can pay off any new charges they make. Often interest free days on purchases are also withheld until the transferred balance is repaid, so balance transfer credit cards are not usable without adding to existing debt until the existing debt has been paid off.
If you can responsibly restrain your use of credit cards until you have paid your transferred balances in full, then you may be interested in debt reduction strategies using one of our range of balance transfer credit cards.
Need to reduce your debt?
It's a great feeling when you pay off a debt. It's a huge relief to no longer be living under that debt cloud, and of course it's a very proud moment because all that budgeting and going without has paid off.
However, it's sometimes easy to forget that final $1000 may have accumulated interest if you didn't pay it off before the due date.
Added interest can be a crushing blow to your efforts to get yourself out of debt, so is there a way to avoid being hit with interest charges other than paying off the full amount owing on the card before the due date?
A Balance Transfer could be the answer.
A Balance Transfer enables you to transfer your current outstanding credit card balance to a new card with a reduced interest rate. Credit card providers can offer balance transfer rates for as little as 0% p.a. for a set amount of time. It is a great way to reduce your existing debt as it allows you to pay more off your principal and less interest.
How Balance Transfers save you money.
Balance transfers reduce the amount of interest you have to pay on an existing debt, enabling you to not only reduce the amount you have to pay per month, but in some instances reducing the amount of time required to pay off the total debt.
Say you owe $3000 on your credit card with an interest rate of 17.99%. If you are paying $50 a week off that debt it would take you 1 year and 6 months to pay off, and you would be hit with an additional $572.40 in interest!
However, if you transferred that $3000 to a new credit card with a balance transfer rate of 2.99% for 12 months, you would not only be able to pay the debt off 2 months earlier, but you'd be saving yourself a huge $360.40 in interest.
The savings you can make from a balance transfer become particularly apparent when you have a large debt. To pay an $8000 debt off in a year, you need to make a payment of $750 a month. At an interest rate of 17.99%, you’re paying an extra $882.60 in interest. At a balance transfer rate of 2.99% for 12 months, the total interest you pay reduces to $212.20, saving you $670.40!
If you can afford to pay a bit more off your debt over a shorter period of time, a 0% balance transfer over 6 months can be a great way to get debt free sooner. A $5000 debt at an interest rate of 13.24% p.a. will incur $238.60 in interest charges over 6 months. That $5000 debt at a 0% balance transfer rate for 6 months will save you that $238.60 in interest, provided you pay the entire amount owing within the balance transfer term.
Beware hidden charges.
One of the biggest mistakes people can make with a balance transfer credit card is to begin using it for regular purchases or cash advances. This becomes a problem because many providers will take any payments you make in the beginning and add them to your balance transfer debt first. Any additional purchases you make on your balance transfer credit card will not be paid until the entire amount that you have transferred to the card is paid off. Some providers also exclude customers from interest free periods when they have a balance transfer, meaning purchases you make will incur the balance transfer credit cards regular purchase interest rate, and you’ll be getting yourself into a debt trap all over again.
Another thing to remember is to pay the total balance transferred before the balance transfer term is over. Depending on your bank, you may be charged the regular purchase rate on the remaining balance, or you may be charged interest at the cash advance rate, which is often much higher. Paying off your balance within the set balance transfer term ensures you pay the minimum amount of interest possible, and gets you out of debt faster.
Lastly, some providers may charge a fee for balance transfers, so make sure you read the fine print and factor this cost into your total debt.
Can I get a balance transfer card from my existing bank?
No. To qualify for a balance transfer offer, you must move your current debt to another credit card provider. As an example, you cannot transfer your debt from Bank A’s Awards Card to Bank A’s Low Rate Card. You must transfer your debt with Bank A to a card from Bank B to qualify for a balance transfer.
How do I figure out what is the best balance transfer card for me?
You need to consider several factors when choosing a balance transfer credit card.
Firstly, how much can you afford to pay off each month? You get the best deal from a balance transfer credit cards when you pay the total amount owing before the balance transfer term ends. So while a 0% balance transfer rate for 6 months may be the lowest on offer, if you cannot repay the total amount within that 6 month term, the remaining balance will incur interest at the regular purchase rate, or in some instances the cash rate. If you can’t afford to pay the total amount within a 6 month time frame, an offer of 0.99% over 9 months or 2.9% over 12 months may better suit your budget.
Secondly, factor the annual fee into your budget. How much is the annual fee and will you be able to afford that amount on top of your balance transfer payments?
If you choose a balance transfer rate over a term that suits your budget and an annual fee you can afford, you’ll be in a great position to pay off your debt sooner.
I have a poor credit rating. Can I still get a balance transfer credit card?
If your credit rating is poor, your balance transfer may not be approved. The reason for this is that no credit card provider wants to be the one that has to write off the debt if you declare bankruptcy. This is done on a case by case basis, so it is still worth talking to the credit card provider and applying for the balance transfer.
How can I apply for a Balance Transfer Credit Card?
Creditcards.com.au has compiled a list of some great balance transfer offers. Have a look at what’s available and get out of debt sooner!