A 0% interest balance transfer might solve your credit card problem

Credit card debt can be crippling, because high monthly interest charges can make it hard to pay down the principal.

That’s why one possible solution for some Australians might be to do a balance transfer.

A balance transfer is when you transfer the debt from your existing credit card to a new credit card – generally in return for an interest-free period, and possibly a lower interest rate as well.

The idea is that you use this interest-free period to pay down or even pay off your debt, because now that you don’t have to pay interest, all that money can go to debt reduction.

No interest for 18 months

To illustrate the point, let’s look at a hypothetical case study involving Chris, a 40-year-old teacher with a credit card debt of $5,400 and an interest rate of 19.99 per cent.

If Chris made the minimum credit card repayment each month, it would take him 47 years and three months to pay off the entire debt, and it would cost him $26,507, according to ASIC’s credit card calculator.

If Chris made higher repayments of $300 per month, it would take him 22 months to pay off his credit card debt at a total cost of $6,346.

However, imagine Chris did a balance transfer with the Bendigo Bank Low Rate Mastercard, which offers an 18-month interest-free period for balance transfers. If Chris paid the same $300 per month, he’d repay the entire $5,400 debt during those 18 months, which means he wouldn’t have to pay a cent of interest. That said, he would have to pay a 2 per cent balance transfer fee, or $108. The total bill would come to $5,508.

Beware of balance transfer traps

One point to bear in mind with balance transfers is that the interest-free period generally applies just to the debt you transfer across.

So you will generally be charged interest if you make purchases or do cash advances with the new credit card. You might also be charged an annual fee. Also, you will be charged interest on any unpaid debt at the end of the balance transfer period. 

Another point to bear in mind is that you might want to close your old credit card once you open the new credit card. Otherwise, you might be charged two annual fees and face greater temptation to spend money.

About the Bendigo Bank Low Rate Mastercard

• Interest rate = 11.99%
• Cash advance rate = 13.99%
• Annual fee = $45
• Maximum interest-free period = 55 days
• Balance transfer interest rate = 0% for 18 months
• Balance transfer fee = 2%
• Balance transfer limit = 80% of your credit limit

* Data accurate as of 24 October 2019

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