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.
Balance transfers can be a good way of paying off debt if you choose a low-interest rate with enough time to pay it, but many people may not know about some of their pitfalls – hidden or otherwise.
Keep reading to discover what balance transfers cost.
What do balance transfers cost?
Balance transfer costs you need to be aware of include:
|1||The balance transfer fee||Some cards charge a fee of up to 3% of the balance being transferred|
|2||An annual card fee||Some cards charge a fee of up to $700/year|
|3||The purchase interest rate||Any new purchases made using a balance transfer card will be charged the purchase interest rate, which can be up to 24.99% p.a.|
|4||The revert rate||If you don’t pay the debt before the promotional period ends, you could pay an interest rate of up to 21.99% p.a.|
We discuss each of these in more detail below.
1. Balance transfer fee
A balance transfer fee – usually around 1% to 3% of the amount being transferred – is the fee that is charged when you transfer your existing balance to a new credit card.
While 1% to 3% might not seem like a lot, it can add up to quite a lot if you are transferring a large credit card debt. Since this number could potentially be bigger than the amount you’d stand to save in interest by switching to a balance transfer credit card, in some cases it would be a better idea to just stay with your existing account.
However, the balance transfer fee is often capped at a certain amount, which is typically between $25 and $100.
How much you can expect to be charged from a balance transfer fee can usually be found in the relevant product disclosure statement (PDS). Make sure you consult the PDS before settling on any particular balance transfer card.
2. Annual card fee
Some, but not all balance transfers, come with a yearly fee. Some credit card annual fees can cost as much as $700.
A no annual fee card, as the name suggests, is a card that doesn’t charge a regular yearly fee. A card that does that also has a low or $0/year annual fee – as well as a 0% promotional interest rate on balance transfers – can represent great value for consolidating and repaying credit card debt.
3. Purchase interest rate
While the initial debt that you transfer over to the new credit card might not attract any interest initially, any extra purchases you make on that card could attract interest from the day of the purchase. The purchase interest rate can be expensive – right up to 24.99% p.a. for non-rewards credit cards!
So in many cases, it can be more expensive to buy things on a balance transfer credit card than it would be with a regular credit card. But since the main purpose of a balance transfer is to eliminate debts, you shouldn’t be buying anything with it anyway!
4. Credit card revert rate
The revert rate is what gets a lot of people. Say for example you take out a balance transfer with a 0% interest rate for 12 months. Your financial institution is banking (pun intended) on you not being able to pay your balance off in that time.
The instant your unpaid debts reach the end of the 0% interest period, the revert rate kicks in.
The credit card revert rate is the ongoing interest rate the bank charges you at the end of the promotional period. While this rate is different for each card, it is typically higher than the rate of standard credit cards. In fact, even with some non-rewards credit cards, you can go from a 0% interest rate to a 24.99% interest rate:
|Balance Transfer Rate||Revert Rate|
|Minimum||0.00% p.a.||7.99% p.a.|
|Maximum||7.90% p.a.||24.99% p.a.|
Rates current as of 18 December 2017.
Make sure you pay off your balances well in advance of the promotional period ending! If you don’t think you can pay down the entire balance by the end of the promotional period, then either don’t get a balance transfer card or get one with a longer promotional period, because you don’t want to pay that revert rate.
Lowest cost balance transfers
After comparing all of the above four fees and rates, a balance transfer that looks cheap can actually end up being quite expensive. When considering a balance transfer, try to work out how much it will cost you over the years compared to other options. Our data takes into account the purchase rate, the promotional rate and the annual fees in order to work out an approximate cost over three years.
Out of the low-rate balance transfer credit cards on Canstar’s database with links to providers’ websites, the table below displays a snapshot of the five with the lowest approximate cost over three years for a monthly spend of $2,000.
Other things to be aware of
Even though you may not be charged any interest on your initial credit card debt when you use a credit card balance transfer deal, there are other potential traps to be aware of.
In addition to the hidden costs, here are some other facts about balance transfers that many people may not know:
Balance transfers are not instantaneous
Transferring your balances from old cards to the new balance transfer card doesn’t happen overnight; it usually takes about 2 – 4 weeks. You will need to keep your old card active during this process, or you’ll risk incurring extra fees and interest.
Balance transfers are limited
The majority of balance transfer cards have a transfer limit. That is, you can only transfer money from one card that is no more than a certain percentage of the limit, such as $900 onto a $1,000 card if the maximum balance transfer is 90%. You will need to check what this amount is with your bank.
While a credit card balance transfer deal may be a good move to help you tackle and pay off a pesky credit card debt, carefully checking the terms and conditions first before choosing the right card for your situation.