Expert guide to credit card balance transfers

Without the right management, debt can become uncontrollable. Making payments on your debt, even on low-interest credit cards, is important not just for peace of mind but also your credit score.

The Australian Securities & Investments Commission’s debt clock, which keeps track of how much credit card debt we have accrued as a country, notes that the average cardholder is carrying about $4,300 of debt on their card. The average cardholder pays about $750 in interest per year if their interest rate is between 15 to 20 per cent.

When debt and interest payments get out of hand, or you simply want to consolidate your payments into one lump sum, there are solutions available – including balance transfers on a new credit card.

Research from Roy Morgan has shown that while debit cards are on the rise, credit cards are still more popular in Australia. They can offer easy access to spending as well as a sound way to manage debt, but comparison and planning is key. Use RateCity’s credit card comparison tool to determine if a credit card balance transfer can work for your budget and spending habits.

What is a credit card balance transfer?

A credit card balance transfer is a form of debt consolidation. It involves transferring the debt from one credit card – and perhaps several other loans as well – onto a new credit card. As a general rule, the new credit card should have a lower interest rate.

To entice customers, some lenders offer a honeymoon period during which they either charge no interest or a reduced rate of interest. However, once the honeymoon period is over, the interest rate will revert to the normal level.

How do I apply for a credit card balance transfer?

You can apply for a credit card balance transfer by approaching a lender directly or by going through a comparison website such as RateCity.

Can I include personal loans in a credit card balance transfer?

Some lenders will allow you to include debt from personal loans – and also other sources – when you complete a credit card balance transfer.

What debts can’t be included in credit card balance transfers?

Credit card balance transfer rules vary from lender to lender. One common rule, though, is not to allow any debts that would exceed the credit limit on your new card. Another common rule is not to allow debts from outside Australia.

What are the pros and cons of credit card balance transfers?

If done properly, a credit card balance transfer will improve your financial situation. One way this can be achieved is to switch to a credit card that charges a lower interest rate, comes with lower fees and charges, and offers superior rewards. You can also benefit if your new credit card offers a honeymoon period with no interest or a reduced rate of interest. A credit card balance transfer might also allow you to consolidate several debts into just one debt, thereby making your debt easier to manage.

Sometimes, though, people make mistakes with credit card balance transfers and therefore worsen their financial position.

Honeymoon periods can be a source of trouble, for two reasons. First, some people might not take advantage of the honeymoon period to pay off debt. Second, some people might accidentally sign up for a credit card whose post-honeymoon interest rate is actually higher than their previous credit card’s interest rate. On a similar note, the new credit card might have higher fees and charges than the old credit card.

Another mistake is not to cancel old credit cards; this can be harmful because you might be charged extra fees and you might be unable to resist the temptation to accumulate additional debt. That leads on to another common mistake – continuing the same spending habits that caused the debt problem in the first place.

How can I make credit card balance transfers work for me?

There are four main rules to follow if you want to improve your financial position with a credit card balance transfer.

First, read the fine print carefully, to make sure that your new credit card will have a lower interest rate than your current credit card once any honeymoon period is over.

Second, take advantage of any honeymoon period to pay down as much of your debt as possible.

Third, make sure you bring a new attitude to your new credit card, because if you maintain your spending habits, you might dig another debt hole for yourself.

Fourth, make sure you cancel your old credit cards, so you aren’t tempted to accumulate additional debt and so you don’t get charged any additional fees.

Can I still get credit card rewards points?

This differs from lender to lender. Some lenders will refuse to provide rewards points during the balance transfer period, while others will be happy to do so.

Are there fees for credit card balance transfers?

This differs from lender to lender, but fees usually apply. Most lenders will charge you a percentage of the amount being transferred.

Can anyone do a credit card balance transfer?

If a particular credit card offers balance transfers, and if you qualify for that credit card, then you can do a balance transfer.

What do I need to do a credit card balance transfer?

First, you need to complete the standard application process for your new credit card. Second, you need to provide your new credit card company with the details of your original account, so the balance can be transferred. A clever third step would be to then cancel your old credit card, so you aren’t tempted to accumulate additional debt and so you don’t get charged any additional fees.

How hard is it to do a credit card balance transfer?

Completing a credit card balance transfer is a common and straightforward procedure.

How long does it take to do a credit card balance transfer?

Credit card balance transfers usually take two to four weeks to complete.

Why do credit card companies allow balance transfers?

Credit card companies use balance transfers as a way to attract new customers.

Who regulates credit cards?

Credit card providers must abide by the National Credit Act, which is regulated by the Australian Securities & Investments Commission (ASIC). Banks are also regulated by the Australian Prudential Regulation Authority (APRA).

What is debt consolidation?

Debt consolidation is a strategy that involves using the proceeds of a new loan to pay off several existing loans. Borrowers can lower their repayments if the new loan has a lower interest rate than the old loans. Another advantage is that borrowers now have fewer loans to manage.

Can you provide a case study of a credit card balance transfer?

Let’s take a hypothetical consumer named Peter, who is 22 and who has recently entered the workforce.

Peter has accumulated $10,000 of debt on his credit card, which charges an interest rate of 15 per cent. He can’t see any way to eliminate this debt because he struggles to make the minimum repayment each month. That means he’s basically just paying interest without reducing the principal.

One day, Peter hears that Bank X is offering a special deal to attract new customers. If you sign up for a Bank X credit card and complete a balance transfer, Bank X will give you an 18-month honeymoon period during which it charges no interest.

Wisely, Peter does his research before taking up this offer. First, he investigates what the ‘normal’ interest rate, or ‘revert rate’, will be once the honeymoon period ends. It turns out to be 12.5 per cent, which is lower than his current rate.

Second, he compares annual fees. This is another win, because Bank X charges $49, while his current credit card provider charges $59.

Third, he does his sums with the balance transfer fee, which is 1.5 per cent. Peter wants to transfer $10,000 to the new credit card, which means he would be charged $150.

After crunching the numbers, Peter realises that it makes sense to switch to Bank X. Sure, he will have to pay the balance transfer fee – but this will be more than cancelled out by the 18-month interest-free honeymoon and the lower revert rate.

Peter submits his application. Two weeks later, his application is approved and the balance transfer is completed.

Peter realises that he needs to change his habits if he wants to get out of debt. So he does three things. First, he cancels his original credit card, so he isn’t tempted to accumulate additional debt (and so he doesn’t get charged any additional fees). Second, he makes a promise to himself to reduce his spending. Third, he makes a plan to pay off his credit card debt during the 18-month interest-free period.

To achieve that last goal, Peter will have to repay $128 per week. It won’t be easy, but he recognises that this gives him his best chance to escape his credit card debt nightmare and move on to a better financial future.