Credit card balance transfers: What you should know

According to the Reserve Bank of Australia (RBA), the country has around $33 billion dollars of credit card debt. The RBA also reports that Australians save 9.3 percent of their disposable income, on average. So, if Aussies so are concerned with padding their savings accounts and maximising their dollar, surely they’d be concerned with reducing credit card debt too?

Of course while people will try to spend less or budget better to reduce the amount they owe on their credit cards, many will opt to switch cards to take advantage of zero percent interest offers.

But surely if you could simply transfer your credit balance to avoid interest, people would do it all the time and never pay a cent on what they borrow? Well, there are restrictions in place for this very reason, and being aware of them could help you avoid being stung by fees when trying to save money.

Switching credit cards

Changing from one credit card provider to another can often yield a better interest rate than the one you currently have. Check out RateCity’s credit card comparison tool to learn more about what offers are out there. But what about taking advantage of a zero percent offer?

These deals usually have no interest charged on the balance transferred for a set period of time, maybe six moths or a year. There are two caveats in that sentence that are very important to note.

1) Balance transferred

Often when you transfer your balance to a new credit card, you’ll be tempted to increase your limit — heck, there’s no interest, right?

Wrong. Spending money on this card over your balance transferred will attract interest and it can be more than your previous rate!

2) The interest-free period

Under this scheme, if you don’t manage to knock off your entire debt in the allowed time, you then revert to that card’s full interest rate. Again, that could be higher than the rate you are paying now.

If you have a small debt that you could eliminate in the six months or so that you have without interest it could be a beneficial situation, but for larger amounts, you could be stung with high interest payments on the remaining balance. The revert rate can often be higher when the interest-free term is longer.

In these situations it could be more beneficial to switch to a card with a low lifetime interest rate. Although there is no interest-free period, it could save you money in the long run if you’ll be paying off the debt for some time.

And the fees?

Of course, there has to be a catch to an interest free credit card. There are fees on balance transfers, which is how the finance provider makes their money on these facilities. Some fees to be aware of include annual fees, which are typically charged from the outset so will need to be factored into the cost of switching. Another fee charged by some providers is known as a ‘balance transfer handling fee’ and may be charged as a flat fee or a percentage of the balance being transferred.

Of course if you only transfer once, it won’t be much of a problem. However, if you plan to hop from one provider to the next, the string of charges may soon start to outweigh the benefit of not paying interest. There’s also all the time involved in that exercise as well.

So, what should I do?

Reigning in your credit card debt is all about smart choices. At some point the intelligent option might be to make a beneficial switch to a low-interest or no-interest card. However, true financial mastery comes from planning your spending.

Talking to a financial professional about your personal finances or setting up a good budget is a great place to start. Once you have a very good idea of your financial position, you can plan around what payments you can afford to make to bring your debt down, and whether switching cards will ultimately work for you with the fees and revert rates involved.

Compare credit cards