Should You Balance Transfer Your Christmas Debt?

20 December 2017
If you’re worried about the financial repercussions of your extreme Christmas generosity, a balance transfer might put your mind at ease. But there are some traps to be aware of.

A total of $50 billion – that’s how much the Australian Retailers Association expects Australian shoppers to spend over the Christmas period in 2017. It’s fair to say a good chunk of this will be paid on credit – around 36 percent according to MoneySmart.

Based on those findings, it can be estimated that Australians will spend around $18 billion in total on their credit cards this Christmas. It’s inevitable that some will struggle to repay their share of this debt in a timely way. So to help avoid being smacked with interest, they might consider a balance transfer.

Christmas Debts – The Balancing Act

Balance transfers can act as a saviour from a debt-laden Christmas hangover, rescuing people from the immediate threat of high interest charges on their enormous debts, but there are some potential dangers.

Industry super fund-owned bank ME recently went so far as to support a ban on 0% balance transfers, citing in-house research that demonstrates how such offers can “prolong unsustainable debt behaviour”.

According to their survey of 2,216 credit card holders in 2015, around 40 percent said they took up cards specifically for balance-transfer offers, allowing them to put old debts onto a new card at zero interest for a set time, often up to 18 months.

But ME also found that 29 percent of all balance transfers aren’t cleared before the interest-free period ends.

ME Head of Deposits and Transactional Banking, Nic Emery said that for this 29 percent, balance transfer offers allow them to put off their personal debt crisis and encourage further spending.

“With no interest to pay for 18 months and no requirements to cancel their existing cards, many cardholders may feel like they’ve got their debts under control,” he said.

“We know that a large number aren’t learning to change their spending habits because over half (53%) of those who accept zero per cent balance-transfers continue to revolve their debts on a regular basis, compared to 37% overall.

Mr Emery also said he was concerned by the fact that 70 percent end up purchasing on balance transfer cards – suggesting people don’t know their cards have two interest rates – an ‘introductory rate’ and a ‘purchase rate’.

“A lack of understanding of how the interest rates apply can lead to further debt problems,” he said.

“The best advice for people with balance transfer cards is not to touch them for new purchases and to focus on paying down the outstanding debt before the balance transfer period expires.”

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Balance Transfer Traps

If you are responsible with your debt and bear in mind the traps, balance transfers can still be a good way to help you manage and pay off your Christmas debts. Some of these traps include:

  • Revert rates: The high rate of interest charged on the debt balance upon the expiry of the 0% introductory period.
  • Purchase rates: Any purchases made on the balance transfer will be charged at this high rate (which can be as high as the revert rate) right from day one.
  • Balance transfer fees: Despite offering a 0% for however many months deal, some cards will still charge a “balance transfer fee” of up to 3% of the amount being transferred.

Current Balance Transfer Deals

If a balance transfer sounds like something you will need, particularly after you’ve spent yourself silly over the festive season, be sure to do your research and compare to find a good deal. The table below displays a snapshot of some of the balance transfer deals available on Canstar’s database, with links to providers’ websites, sorted by length of 0% balance transfer period.

Do a comparison yourself and click below to compare all the balance transfer deals on Canstar’s database.

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