If your credit card balance is larger than you’d like it to be and the interest is starting to add up, it might make sense to transfer the balance over to a card with a more competitive interest rate. Credit card providers are always on the lookout for new customers, and one way of bringing you over is by offering a highly incentivised interest rate on balance transfer deals.
What is a balance transfer card?
A balance transfer card works by literally taking your credit balance from one card and transferring the whole amount over to a new credit card with an incentivised and more affordable interest rate. Generally speaking, balance transfer cards offer 0 per cent promotional rates for a set period of time, which is anywhere between three and 12 months. After the honeymoon period ends, the interest rate usually shoots up and can leave you with a whole lot more in interest and fees.
For a balance transfer card to work in your favour, you’ll ideally need to pay off the balance while the promotional interest rate is still 0 per cent. In some cases, there may be additional fees if you still have an outstanding balance when the promotional period ends. Before you apply for a balance transfer card, make sure you compare your options and leave yourself enough time to pay off your debt.
If you decide that a balance transfer card is right for you, the actual process of rolling your balance over to a new card is relatively simple. When you fill out the application, you’ll provide the name of your current credit card along with the card number. Once you’re approved, the new card provider will reduce the balance of your old card to $0 and transfer it to the new card.
What is a 0% balance transfer card?
Some balance transfer cards offer an introductory 0 per cent interest rate when you transfer your existing balance onto a new credit card. A 0 per cent interest rate is usually valid for a fixed period of time and literally charges you no interest on the amount you transfer over. Depending on the card, you may be charged a one-time transfer fee when you move the balance over. A 0 per cent interest rate can potentially save you from accruing additional interest while repaying your credit card debt.
Credit cards with 0 per cent balance transfer are usually available for periods starting from two months up to 24 months.
The benefits of a balance transfer card
A balance transfer card is a great short-term strategy to save you money and reduce your credit card debt. The major benefit is that you have a definitive period in which to pay back the money you owe without adding any additional interest. Because balance transfer cards are often bundled together with other benefits like reward points or free travel insurance, you might find a credit card that can help you pay off your balance with great benefits.
What to look out for when comparing balance transfer cards
Before you choose a balance transfer card, make sure you check what happens when the promotional period ends. You specifically want to check what the post-promotional interest rate will be. In most cases, they tend to be on the higher side. If you’re not certain you can pay the entire card balance off, do the sums to make sure you're not worse off when the rate reverts back to the standard.
Some cards also charge an initial fee to transfer the balance over, which is added to the balance on the new card. Before you make the switch, compare any additional card or annual fees against what you’re currently paying to ensure you come out on top.
A common misconception with balance transfer cards is that you don’t have to pay anything during the promotional period. This is not the case. Even if the card offers you a 0 per cent interest rate, you still have to pay the minimum balance each month. If the balance transfer card has a period of interest-free days, you won’t be able to take advantage of this until you’ve paid the entire balance off.
When the incentives are so appealing, it can be tempting to apply for multiple balance transfer deals. Every time you make an application for a credit card, it gets recorded on your credit report.
How to use a balance transfer card to consolidate debt
If you’ve got a manageable amount of credit card debt which you can pay off within the card’s promotional period, then a balance transfer card might be worth considering.
The main consideration with balance transfer cards is what happens when the honeymoon period ends. If you’ve done the maths and it’s not likely that you’ll pay the card off before the promotional rate ends, you might be better off exploring other debt consolidation options, like a personal loan.
Before you make a decision, do your research and compare your options to make sure you find a balance transfer card that works for you.
^Depending on your finanical situation, the best balance transfer card for you may not be the best balance transfer card for somebody else. Compare the available options, consider how different features and benefits can help you reach your financial goals, and read the fine print before making any decisions. If you need help deciding on the best credit card for you, consider contacting a qualified financial adviser.