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More Information About Balance Transfers

What is a credit card balance transfer?

A credit card balance transfer means transferring your credit card debt to a new credit card with a lower interest rate so that you can afford to pay it off. This lower interest rate is often a promotional rate, and you need to pay off the debt before the end of the low-rate or promotional period or else you’ll be charged a higher interest rate.

Balance transfers can help if you choose a 0% interest or low-interest deal with enough time to pay it, such as a transfer period of 14-18 months. Of course, you also need to ensure that you won’t be charged a high fee for the balance transfer, make sure you cancel your previous credit card, and not make any new purchases on the balance transfer card (to prevent your debt growing).

If you’re using a balance transfer to pay off a debt, we recommend that you use our best tips for budgeting and saving money while you’re paying off your debt. Then once you are financially fit and living within your means, you can keep the saving habit going to build something for the future.

 

What type of credit card balance transfer deals are available?

According to the CANSTAR database as of August 2016, we only rate balance transfers with a 0.00% promotional period, and interest rates on purchases range from 6.99% up to 20.99.

These rates then revert to rates of between 14.99% and 21.74%, making it vital that you pay off your debt during the balance transfer period.

We make shopping around for the best rate easier by collecting the data from different providers and letting you compare balance transfer credit cards and compare credit cards on our website.

It might sound like a balance transfer is the way to go for paying off a debt, but there are definitely some things to think about first. You need to compare balance transfer rates and fees to find the best deal.

Some of the extra “hidden” costs involved in a balance transfer can include reversionary interest rates, transfer fees, and annual fees.

The credit card interest rate

The reversionary interest rate is the interest rate that the card switches to after the introductory low-rate period (the “honeymoon” period). This reversionary rate can be right up in the top end for credit cards, around 23.50% at the time of writing. If the card has a high reversionary rate and you haven’t paid off your debt by the time the low-rate ends, you should consider doing another balance transfer.

Then what if you made purchases on the balance transfer card? With some cards, these can be charged at 0% for a certain time period, before reverting to a higher rate. But with most cards, these will usually be charged interest (6.99% up to 20.99% at the time of writing) or the reversionary interest rate (14.99% up to 21.74% at the time of writing) from the day of the purchase.

The credit card transfer fee

“Balance transfer fees” are one potential trap you need to keep your eyes open for, as these fees can amount to up to 3% of the amount being transferred. That’s a big chunk of money you would be spending for nothing!

The credit card annual fee

If you’re looking at a 0% balance transfer deal for something crazily long like 2 years, you might assume that’s a great deal. But these credit cards with a longer interest-free timeframe may well charge a higher annual fee. So depending on how much you transferred, the saving you made on your interest can get wiped out by this fee.

At the time of writing, annual fees on balance transfers range from $0/year up to $700/year.

Some example sums…

Let’s look at a quick example. Assume someone has a debt of $5,000 and can afford to pay $200 per month towards it. What would be the options?

  • Transferring the debt to a 2 year interest-free card with a high annual fee could actually be the most expensive option!
  • A cheaper choice could be to take a 12 month interest-free deal with no annual fee and a high revert rate.
  • An even cheaper choice could be to take a standard low-rate card with a low annual fee.
Card condition Annual fee Revert Time to repay Total cost
0% for 24 months $200 21.75% 2 years, 5 months $5,638
0% for 12 months Nil 19.99% 2 years, 3 months $5,354
No interest free period $36 7.99% 2 years, 5 months $5,607
Source: www.canstar.com.au  Based on a repayment of $200 per month on a starting debt of $5,000.

Whether a balance transfer is a good option for you really depends on:

  1. Your financial situation – how likely it is that you will be able to pay off the debt during the interest-free balance transfer period.
  2. Your spending profile – while occasional spenders can benefit from using a balance transfer to pay off a large, once-off purchase without paying interest, habitual spenders (a.k.a. constant credit) would be better off learning to budget with a low rate card or no credit card at all.
  3. Likelihood of making any other purchases on the card (which you would pay a high interest rate on) while trying to pay off the interest-free debt.
  4. Whether or not you intend to keep using the card after paying off your debt, knowing that balance transfer cards have a high reversionary interest rate.

If you’ve assessed your financial situation and you think a balance transfer will help you to pay off a debt, here’s how to make a balance transfer work in your favour:

  • Create a comprehensive budget so that you know exactly what you can afford to pay off on a balance transfer every month.
  • Choose a credit card that suits you. That might mean a credit card with a 0% or low interest deal, a $0 or low annual fee, a relatively long transfer period (12 months or longer), and/or no balance transfer fee.
  • Cancel your previous credit card, to avoid the temptation of running up a whole new debt.
  • Do not make any new purchases with the balance transfer card.
  • Concentrate on paying off as much of the debt as possible during the interest-free period.
  • Check the reversionary interest rate and, if it is high, transfer any leftover balance at the end of the interest-free period to a low rate card.

Ultimately, the decision on whether to balance transfer or not will depend on your own calculations of the costs and benefits for your situation. Make sure you compare balance transfer deals that are available and do your sums carefully.

What is a credit rating?

When you apply for a loan, you will generally need a positive credit rating in order to be approved. Your credit rating is a measure of how trustworthy you are to be given a line of credit from a financial institution and how likely it is that you will be able to repay that credit.

To get a positive credit rating, you need to accumulate a positive credit history of dealing responsibly with a line of credit. If you pay off the full balance of your credit card every month, this can give you a positive credit rating. But be careful – any missed payments will negatively affect your credit rating.

How to find out your credit rating and get a copy of your credit report

Have you ever checked to see what your credit rating looks like? Were you aware that you have a credit rating? Understanding your credit file enables you to make more informed decisions regarding your finances, so it’s worth having a look.

Your credit rating is something that your financial institution will certainly look at if you apply for a loan – so it’s a great idea for you to read through it first, to make sure there are no nasty surprises. You can order a free copy of your credit report from the authorised credit reporting companies:

You have the right to:

  • Ask for a copy of your own credit report.
  • Check and correct information on your report that’s wrong.
  • Ask that your credit file is “frozen” and not released to anyone without your permission if it contains incorrect information.
  • Complain to the credit reporting company.

What is recorded in your credit history?

Basically, all credit you’ve applied for is recorded:

  • Credit cards and store cards
  • Personal loans
  • Home loans
  • Overdrafts
  • Hire purchase agreements and store interest-free deals
  • Payment history for bills like electricity, gas and phone accounts

Currently, your credit file includes the following information:

  • Your personal details (full name, gender, current and previous two residential addresses, date of birth, driver?s license number and current employer).
  • Any bankruptcy or court judgments.
  • Any director or business ownership details.
  • Any credit applications you have made in the last five years.
  • Any credit providers you currently have credit with – and the credit limit on those accounts.
  • Payment defaults (amounts of $100 or more that are more than 60 days overdue). These remain on your file for 5 to 7 years, even after you have paid them.
  • Overdue accounts where the credit provider has not been able to locate you to request payment. These are termed “clearouts” and will remain on your file for 7 years.
  • Number of credit enquiries made, by whom and when.

Information about your repayment history can be kept on your credit record for up to 2 years. This includes information about accounts you have closed since then.

Who can view your credit report?

Only a limited number of people can gain access to your credit information. These will usually be credit providers who are considering your application for credit. In some strictly limited circumstances, the information may be made available to:

  • Prospective landlords who have offered you a tenancy.
  • Prospective employers who have offered you a job involving significant financial risk.
  • Prospective insurers for your mortgage.
  • Debt collectors enforcing a debt against you.
  • People involved in court proceedings against you.
  • Public sector agencies acting under law.

Credit card debt is on the rise in Australia. According to Reserve Bank of Australia data, our national credit card debt hit $52 billion in 2015 – close to the record. It is now at $52.2 billion, as of June 2016, and we’re paying interest on $31.9 billion of that.

The Wesley Mission has reported that more than 1 million NSW households are spending more than they earn. The Australian Financial Authority reported that personal insolvencies (people going bankrupt) has been increasing steadily every year.

Signs you’re in over your head in debt:

The ABA’s Doing It Tough website lists the following as signs that you might be in debt to a stressful point:

  • Loan and credit card repayments (apart from my mortgage) take up more than 20% of my disposable income.
  • I am generally at – or very close to – the limit on my credit card.
  • I usually only pay the minimum payment on my credit card each month.
  • I often pretend bills and reminder notices are not there. I have skipped repayments hoping I’ll make it up next time.
  • I’ve applied for credit cards just to pay other household or credit card bills.
  • I accept offers to increase the limit on my credit card without considering my financial position.
  • I often struggle to make the rent/loan repayments each month. If I do make the repayments, I struggle to pay for essential items such as food, clothes and medical bills.
  • I haven’t been able to pay the water/gas/electricity bill recently. I sometimes have to go without heating/air-con or go without meals to save money.
  • I use my credit card to buy food or other essential items because I just don’t have the cash.
  • I don’t have car insurance or home contents insurance because I can’t afford it.
  • I borrow money from friends, family, community or welfare organisations to manage my expenses, bills and debts.
  • I have thought about a loan from a payday lender.
  • I have had to sell or pawn possessions to make ends meet.
  • I don’t have a budget or money management plan.
  • I don’t know how much debt I owe in total.
  • I lose sleep worrying about how I will repay all my debts.
  • I have received a letter, default notice or phone call from my utility or phone provider, credit provider or debt collector about outstanding bills and debt repayments.

How to take control of your debt

If any of the signs above apply to you and you need to get your debt under control, take action today:

  1. Face up to your problems. List all of your debts including credit cards and personal loans, and record what interest rate you’re paying on each. Add the debts up into one lump sum you need to pay off.
  2. Consolidate your debt. Check out what interest rates are on offer and put the whole debt into one balance transfer, one personal loan, or one low-rate card. There’s no point paying interest on several cards at once.
  3. Work out what repayments you can afford. Develop a budget by sitting down and writing out all of your weekly expenses. If you’re not sure what you spend on a weekly basis, try using the ASIC MoneySmart TrackMySpend app to keep track of everything you spend. You can use our CANSTAR Budgeting Calculator to work out what repayments you could afford. Finally, use the MoneySmart credit card calculator to see how long it will take you to pay off your debt on a balance transfer or low-rate card.
  4. Talk to your bank. If you let your bank know that you’re experiencing “financial hardship”, they have to help you make your repayments more affordable. If your bank gives you any trouble over that, talk to the industry ombudsman for free – either the Financial Ombudsman Service of Australia or the Credit and Investments Ombudsman. These are free and independent services that help people resolve disputes with their financial institutions.
  5. Switch to cash. Avoid temptation. Take your credit card out of your wallet and cut it up for good. (And cancel the account so you don’t still pay the annual fee on that card.)
  6. Make extra repayments. As often as you can! That way, you’re paying less interest and getting closer to your goal of freedom.
  7. Don’t try to save. It might sound funny, but while you’re paying off a debt, you can’t expect to save money “on the side”. If you have any savings, you need to put them towards paying off your debt.
  8. Don’t invest in anything. Investing in anything extra at this point adds the risk of losing more of your money and possibly ending up in worse debt.
  9. Be patient. It will take time to pay off your debt. Don’t change your actions or make any sudden splurges until your debt is completely gone. Pay your card off.

Where to get extra debt help

There’s nothing wrong with asking for help to get your debt under control. Only you can save your finances and your future, but it takes getting the right advice to know where to start.

We recommend that you seek help from financial counsellors first, and debt agreement companies second, and stay right away from any other debt consolidation companies.

Readers experiencing severe financial hardship can also seek independent and free advice from Financial Counselling Australia. You can use their free Debt Self Help Online Assessment Tool to get an assessment of your debt situation straight away, or contact any of the financial counsellors listed on their website. You can also phone their financial counselling hotline on 1800 007 007 for free from a landline, 9:30am to 4.30pm, Monday to Friday, or look for a counsellor near you on their map.

Another organisation that provides free and independent financial help, from helping you consolidate debt to dealing with creditors and keeping debt collectors away, is Christians Against Poverty Australia. You can call their helpline on 1300 227 000 or find a centre near you.

If you are in an immediate crisis and need some emergency emotional support, call Lifeline‘s 24-hour crisis support service on 13 11 14, or try their crisis support chat service.

Don’t fall for other businesses offering to help you get out of debt. Most of them charge fees and are little more than debt consolidation companies. Always find out first whether a debt company will charge you a fee for their services. You may be able to get the same help for free from a financial counsellor.

Please note that these are a general explanation of the meaning of terms used in relation to balance transfers. Your bank or financial institution may use different terms, and you should read the terms and conditions of your balance transfer credit card carefully to understand all fees, charges and interest rates that may apply.

Account-keeping fee or ongoing fee: A monthly account-keeping fee that is charged by the lender to help cover the administration cost of maintaining the line of credit. Alternatively, you may be charged an annual fee.

Annual fee: A fee charged annually for the use of the credit card.

Automatic transfer: A system that is set up to automatically transfer money from a one bank account into another account at a certain point in time to coincide with bills or payments.

Average daily balance: The balance of your card is determined by adding up all balances during the month and then dividing the total sum by the number of days in a given billing cycle. Most credit card providers calculate the daily balance based on the annual rate.

Balance transfer: Transferring the outstanding balance on your credit card to another card, usually one with a better (lower) rate.

Balance transfer fee: A fee charged when you make a balance transfer. It may be a flat fee or a percentage of the amount you transfer.

Bankruptcy: This is when someone’s debt problems become so serious that they are unable to pay their existing debts and bills. When this happens, they can apply to a court to be declared bankrupt, and any assets or savings they have can be used to pay off their debts.

Cash advance: Withdrawing cash from a line of credit. Usually incurs additional fees and/or a higher rate of interest.

Cash advance fee: A fee charged when you make a cash withdrawal from an ATM using your credit card. The bank may charge a flat fee or a percentage of the amount of the cash advance.

Cash card: Also known as gift cards. A prepaid card with a set balance. Can be used either at a specific retailer, or like a debit card that can be used with multiple merchants using EFTPOS.

Charge card: Instead of having a revolving line of credit, the balance of this card must be paid off in full every month. Charge cards were the first historical versions of credit cards issued by merchants and banks.

Credit limit: The maximum amount you can spend with your credit card before having to pay off some of the balance.

Credit report or credit history: A report from a credit agency that contains a history of your previous loan and bill payments. Banks, lenders, creditors and financial institutions use this report to determine how likely you are to repay a future debt, and it helps them decide whether or not to lend money to you. Your credit rating and credit report are also used by lenders and insurers to set your loan and insurance rates. Find out what is included in your credit report here.

Credit rating: Also known as your credit score. It is an assessment of your credit-worthiness, based on your positive and negative borrowing and repayment history, which is listed as a numerical score. The rating is based on whether you pay your bills on time, your current level of debt, the types of credit and loans you have, and the length of your credit history. Your rating score and credit report are used by lenders when deciding whether or not to lend to you, and are also used by lenders and insurers to set your loan interest rates and insurance premiums. Find out how to check your credit score here.

Creditor: A lending agency to whom you owe money.

Debit card: Also known as a bank card or a cheque card. Allows you to access the money in your savings or checking account electronically to make purchases. Requires a PIN number to confirm identity, and the funds are removed from your account almost immediately.

Default: When a cardholder fails to fulfil their obligation to make the minimum necessary payment on their credit card bill or other loan. Defaults are a serious black mark on your credit report and negatively affect your credit rating.

EFT: Electronic Funds Transfer. The transfer of money between accounts by electronic machines like ATMs, home computers, and EFTPOS machines.

EFTPOS: Electronic Funds Transfer at Point Of Sale. Refers to the payment system used by EFTPOS machines and cards, which merchants use to receive payments from customers using a credit or debit card.

Float: The amount of time that a cheque takes to be cleared or rejected for payment by a bank.

Full balance: The entire amount owing on your card that month, including any purchases made that month, any amounts unpaid from a previous month’s bills, and any interest or fees charged.

Interchange fee: Fees paid between your bank and a merchant’s bank to accept card-based transactions.

Interest rate: The rate at which your outstanding balance increases per month if your bill is not paid or not paid in full.

Interest-free days: The number of days you have to pay your bill in full before interest is charged on the balance. It is the period of time between the date of a purchase and when the payment is due. This period usually does not apply to cash advances.

Introductory rate: A promotional interest rate charged when you first sign up for a credit card, offered to entice new cardholders. These rates are usually very low, but revert to the standard rates after 6 months or so.

Merchant: Someone who sells goods or services to customers for payment.

Minimum interest charge: The minimum amount of interest you would be charged if you are charged any interest. For example, if your total interest charge is $0.75 but the bank’s minimum interest charge is $1.00, you will be charged $1.00.

Minimum payment: The number listed on your bill as the minimum your bank requires you to pay off your credit card for that month.

Ombudsman: If you have a dispute with your bank and have not been able to resolve it through the bank’s internal complaints resolution process, you can contact the Financial Ombudsman Service of Australia or the Credit and Investments Ombudsman. These are free and independent services that help people resolve disputes with their bank or other financial institution.

Over-the-credit-limit fee: A penalty fee charged to you for exceeding your credit limit.

Penalty fees: Fees charged if you violate the terms of your cardholder agreement or other requirements related to your account. For example, your credit card company may charge a penalty fee if you make a late payment or if you exceed your credit limit.

Pre-approval: An initial approval notification that provides a customer with an estimate of the credit limit someone would be approved for if they applied for that type of credit card. This is based on information the bank has about their credit history. It is not a guarantee that the customer will actually be approved for the card if they make an application.

RBA cash rate: The overnight interest rate that the Reserve Bank of Australia offers financial institutions to settle-up on inter-bank transactions. This cash rate influences the interest rate that banks give each other.

Revolving account: An account in which there are not a scheduled number of payments and the balance does not have to be paid off in full each month, as long as the minimum payments are paid. Credit cards are the most common type of revolving account.

Rewards program: Benefits that come with the use of a credit card, often in proportion to the amount of money spent on it. Can come in the form of cash back, shopping vouchers, frequent flyer miles, and general rewards.

Switching: Changing from one product to another with the same financial institution, e.g. switching from a rewards credit card to a savings account with a debit card attached.

Universal default: When one financial institution treats a lender as if they had defaulted when the lender defaults with a different institution.