Drowning in credit card debt? Consider a balance transfer

With around $33 billion of Australian credit card debt currently accruing interest (rba.gov.au), it is clear that more than just a handful of Aussies are battling a credit card debt. It's likely that many of these people are paying far more interest than they need to if they applied for a fully featured rewards card, only to end up using it as an ongoing loan to fund their everyday living. For these people, hunting down a better rate and doing a "balance transfer" to swap their current debt to a more suitable card will be a step in the right direction to debt-free living.

However, a balance transfer isn't something to be rushed into. There are many different deals available – 254 of the 288 personal credit cards available in Australia allow balance transfers and these deals differ significantly. The table below summarises the balance transfer offers available, with different introductory rates, introductory periods and revert rates.

Many balance transfer hunters will be drawn to the 14 zero percent introductory offers available. If used properly, these can be a great deal for some. But for those tigers who don't change their stripes, the intro period (up to 6 months) will soon be over, and all that will matter will be the revert rate.

This can be up to 19.99%, and may reflect the higher cash advance rate rather than a purchase rate. Enter "lifetime" balance transfer offers – a low rate balance transfer rate for the life of the transfer. Currently the top deal for these is 4.90% for life, offered by Citibank and the many Citibank-backed MasterCards. For most people, this will be a better option.

The graphs below compare the total interest and fees paid and total time to repay a $5000 balance transfer with either a 0% for 6 months balance transfer (19.99% revert rate), or a 4.90%-for-life balance transfer. Calculations are based on six different additional monthly repayments ($100-$600) on top of the minimum monthly repayments.

Depending on how much extra is paid each month, vastly different amounts of interest will be paid over longer timeframes.

If only $100 is contributed each month, more than twice as much interest is paid on the zero percent for 6 months balance transfer, which would then take up to 37 months to pay out. However if $600 extra is paid each month ($150/week), the zero percent balance transfer is a better deal, with only $69 interest paid, rather than $120. Repaying in this fashion would take 8 months to pay off the amount owed.

When choosing the ideal balance transfer for your situation, you will need to consider:

How large your balance is
How much you can afford to pay off each week
How likely you are to stick to this
Your intentions for using the card after the balance transfer is paid
Likelihood of making any purchases on the card before the balance transfer is paid

As a rule of thumb, the larger your balance is, and the smaller your repayments are, the more important the revert rate is. For large balances or low repayments, look into lifetime balance transfer offers to avoid being stung by the revert rate. If your track record suggests you are unlikely to stick to your planned repayments, make a conservative and honest estimate, rather than being too ambitious. If you are making a balance transfer as a means of switching your card, rather than eliminating your credit card debt, consider all features and fees of the card before choosing.

Best Laid Plans Come Unstuck

The one factor that can blow the perfect balance transfer sky high and way off course is making purchases before the outstanding balance transfer amount has been paid off. In almost all cases, all repayments will go towards the balance transfer, rather than new purchases. While this may help you pay the balance off quickest, any savings from a low intro rate will soon be eroded by the full rate of interest that will be applied to your purchases. So unless it is life and death, avoid putting any purchases on a card that has a balance transferred to it.

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