If you've racked up more debt than you can handle on your credit card then it's time to start looking at a balance transfer.
When is it a good idea to transfer the balance on your credit card and how do you go about it?
The kids are back at school and you’ve finally found the time to have a close look at your holiday season credit card statement. If the closing balance is alarmingly high with an interest rate to match perhaps it’s time to find a better way to manage both your spending habits and your debt levels.
From time to time credit card providers offer 0 per cent (or low) interest on balance transfers. Such offers can be an opportunity to consolidate your debts and get your finances in order.
By transferring your debts on to such a card you will have a certain amount of months to make interest free payments and get your debt under control.
Good reasons to take out a balance transfer
- If you think you can pay off your whole outstanding balance within the 0 per cent (or discount) interest rate period.
- If you regularly have a carry-over balance on your credit card and your current card has a higher ongoing interest rate and fees than the card offering the balance transfer deal.
- If you have multiple credit cards and want to consolidate down to one card.
Traps to avoid
Not all balance transfer offers are as generous as they seem. You need to go for the lowest transfer rate (preferably 0%) that’s available for the longest period of time to ensure you have the best possible chance of paying off your entire debt.
The discount or 0 per cent interest rate usually only applies to the balance transferred. New transactions will be charged at a higher rate and cash advances can incur a substantially higher rate again.
If you intend to make new purchases on the card or keep using it once you’ve paid off the transferred balance make sure the ongoing rate and fees are competitive and cheaper than the card you’ve transferred from.
You then need to look at the way payments made against the account will be processed. Any payments you make will usually be taken off the transferred balance first, which is great provided you don’t make too many new purchases on the card or use it for cash advances.
If you continue to spend on the new credit card, interest will keep accruing on the whole value of the new transactions until you’ve completely paid off the transferred balance. You need to be careful the interest you accrue on new transactions doesn’t end up costing you more than the interest saved by switching cards.
Savvy transfer techniques
Stop using and destroy your old credit card as soon as you transfer the balance to the card with the discount deal. If you keep using the old card you’ll end up with a bigger credit card debt.
Don’t make new transactions on the new card until you’ve completely repaid any outstanding debt. That way you won’t be accruing more interest and cash advances are to be avoided.
Calculate how much you need to repay each month to clear the transferred balance within the interest-free or discount period. If you owe $5000 and are transferring to an offer of 0 per cent for eight months, you will have to repay $625 per month to clear the debt.
Be a vigilant shopper and compare credit cards and balance transfer features at RateCity.com.au