Balance Transfer Credit Cards
Understanding how to get the best out of a balance transfer
Are you looking to slash your credit card debt? With a balance transfer to a new credit card, you’ll usually pay less, or even no, interest on the debt you move across to your new credit card during the balance transfer period.
To help you get the most out of a balance transfer, here’s a closer look at how they work, as well as some of the pros and cons.
What is a balance transfer?
A balance transfer involves moving the balance of your existing credit card – or credit cards – over to a new card.
There are a wide range of balance transfer offers available from banks and other credit card providers. The balance transfer period will vary from card to card and promotion, but could be six, 12, 18 or even up to 24 months.
There is usually a minimum amount you need to transfer to your new card in order to take advantage of these offers. This too will vary, but is typically between $100 and $500.
What is the benefit?
The interest rate you pay during the balance transfer period will likely be much lower than the standard annual percentage rate on your current credit card. How much you could save will depend on your current balance and interest rate, and the rate that applies during the balance transfer period of your new card.
When should you do a balance transfer?
If you’ve racked up a fair amount of debt on your credit cards and are paying a steep interest charges every month, a balance transfer could make good financial sense. By rolling all of your credit card debt into one interest free payment, you can simplify your finances and pay down your debt faster.
The key to making a balance transfer work in your favour is to pay off as much of the balance as possible while you’re in the balance transfer period. Don’t pay just the minimum monthly payment on your statement.
It’s also important not to make purchases or cash advances during the balance transfer period, as you’ll be paying the standard interest rate on these transactions even during the balance transfer period.
With so many balance transfer offers on the market today, the key is to be selective. Be on the lookout for a card that offers 0%p.a. during the balance transfer period, and that has the features and benefits you want after the balance transfer period expires.
Along with saving you money on interest, there are other ways a balances transfer could help make your life easier.
• They simplify your finances. If you find yourself juggling multiple credit card payments to different banks every month, consolidating the balances onto one card could save you time and stress.
• You can transfer other types of debts. In addition to the balance of your credit card, some banks and credit providers might allow you to transfer other types of debt – including your car loan, student loans, or loans from stores and retailers. Be sure to check the terms of the offer.
While balance transfers offer many benefits, there can be pitfalls if they’re not used correctly.
Here are some important things to keep in mind:
• Limited-time offer. Balance transfers are good for a limited time only (this varies according to the offer, but will typically be six to 18 months). After this your balance will start accumulating interest at the standard annual percentage rate that applies to purchases. This is often referred to as the ‘revert rate’.
• Balance transfer fees. Balance transfers are not always free. Be prepared to pay a balance transfer fee of up to 3% on the entire amount transferred.
• Avoid cash advances. Cash advances come with hefty fees and interest rates that can defeat the purpose of doing a balance transfer in the first place.
• New purchases will be penalised. Anything you buy on the new card will be billed at the standard interest rate for purchases and will start accruing interest immediately (usually with no interest free period).
• No rewards points. If your new credit card is linked to a rewards program, you probably won’t be entitled to earn any rewards points while you’re in the balance transfer period.
• Caps on how much you can transfer. There’s typically a cap on how much you can move across to your new credit card under a balance transfer offer. The calculated amount will depend on the offer, but expect a cap based on percentage of your credit limit (e.g. no more than 70% of your credit limit) or a fixed cap (e.g. $10,000).
• Penalties for defaulting. If you default on any part of your agreement, such as missing a payment or going over your credit limit, the interest rate that applies during your balance transfer period can immediately revert to the standard interest rate.
• New customers only. Balance transfer offers are usually only available to new customers, so it’s unlikely you’ll be able to take advantage of balance transfer offers from your current provider.
As always, be sure to read the terms and conditions of your credit card. By taking the time to understand the fine print, your balance transfer may save you money over the long haul.
Before you apply
Here are the things we think are most important to keep in mind as you look for a new credit card with balance transfer offer:
• Do your research. Compare offers from different banks and lenders to make sure your getting a good deal.
• Read the fine print. Make sure you understand the terms of the offer.
• Think ahead. Look for a card that has the benefits and features you want even after the balance transfer period ends.
At iSelect, you can quickly and easily compare credit cards from different banks. Compare credit cards now to find a 0%p.a. balance transfer offer with the terms to suit your needs.