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Can I use a balance transfer credit card to pay off a personal loan?

Can I use a balance transfer credit card to pay off a personal loan?

If you wish to pay off your debts sooner, one of the options you have is transferring your outstanding debts to a balance transfer credit card with a zero or low interest rate for a set period.

A balance transfer credit card works by allowing you to transfer the debt of one credit card to another card with a lower or zero per cent interest rate for a short introductory period. This helps you to pay off the debt faster by saving money on interest during the low-interest rate period. However, if you are unable to pay off your balance during this time frame, it starts accruing interest, potentially adding to your debt.

Cardholders typically use balance transfer credit cards to pay off their existing credit card debts by shifting to a lower interest rate for a fixed period. However, a handful of credit cards also let you balance transfer a personal loan to pay it off faster without any interest charges during the introductory period. Citi Australia is one such credit provider that may allow you to balance transfer your personal loan to a credit card. 

Is there a limit to how much debt I can transfer on a balance transfer card?

Yes, a balance transfer card usually comes with a transfer limit that’s related to your approved credit limit. When applying for a balance traansfer, the credit issuer assesses your income and expenses and reviews your credit history to determine your maximum credit limit. You are generally allowed to transfer debts not exceeding 80-95 per cent of your new card’s approved credit limit.

What are the benefits of balance transferring your personal loan to a credit card?

The main benefit of using a balance transfer credit card is a chance to save money on interest charges by moving your debt to a low or zero per cent introductory interest rate. This could help you pay off your personal loan faster, as more of your repayments are applied towards reducing the principal due to lowered or no interest charges during the introductory period.

Another potential benefit of using a balance transfer credit card could be consolidating several small debts on a single, low-interest rate card with a single monthly repayment. However, if you are not careful enough, a balance transfer card could be a trap leading to a debt spiral. 

Are there any downsides to using a balance transfer credit card?

Whether or not a balance transfer credit card could benefit you depends on the size of your debt, the balance transfer offer on your card, and how you use it.

A balance transfer credit card is only helpful if you plan to pay off the full amount before the end of the balance transfer period. If you fail to do so, you are likely to be hit with a high revert rate, which is the interest rate on your card once the introductory period is over.

If you manage to use the balance transfer period to pay off your debts, the high revert rate won’t be a problem. However, if you find it hard to stick to a budget or tend to shop impulsively, it’s easy to continue making the minimum repayments on the card while accumulating more purchases on it,potentially making your financial situation worse than ever.

One tip that may help you decide whether or not a balance transfer is a good idea is dividing your debt by the number of months in the introductory period. This will give you an idea of the repayments you need to make each month to clear your debt within the introductory period. If you find you’ll take longer, it may be worth continuing with your personal loan for the time being until you find a more affordable way of tackling your debts.  

If you have decided to use a balance transfer credit card to consolidate your debts, you may compare offers from different credit providers to get a competitive deal. Some credit cards charge a one-time fee for processing a balance transfer, which can amount to up to three per cent of the total debt you transfer. You may also find some credit cards that don’t charge any balance transfer fee, but it’s worth reading the product disclosure statement to uncover any hidden fees that could add to your costs.

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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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