The survey also found approximately 930,000 credit card users had “persistent debt” meaning they’d been charged interest and had regularly come close to or exceeded their credit limit over the previous 12 months.
When it comes to consolidating credit card debt, a balance transfer can be an effective option for some consumers. But it isn’t for everyone – in fact, according to ASIC’s report, one in three Australians who used a balance transfer actually increased their debt by more than 10%.
A credit card balance transfer is when you transfer any credit card debt to a new card, generally with a lower interest rate.
There are a number of credit cards in the marketplace offering balance transfers with low or no-interest periods, which could help some people pay down their existing debts faster. However, if you are planning to take advantage of one of these, there are a number of things you should keep in mind. Here we round up some of our top tips.
Tip 1: Be aware of the introductory rate
Many providers offer a special introductory interest rate for balance transfers, starting from 0% in some cases. The average introductory balance transfer rate on Canstar’s database is currently 1.47% p.a. for non-rewards credit cards.
For someone with credit card debt, taking advantage of an introductory rate offer could save them interest in the short-term. As an example, for someone with a $10,000 debt, the difference between paying the average interest rate of a rewards credit card on Canstar’s database compared to a 0% introductory interest rate over 12 months is $1,107, excluding the impact of any potential fees.
Below is a table that demonstrates the difference in interest paid over 12 months on a debt of $10,000, comparing the average interest rates attached to rewards and non-rewards credit cards against the average and minimum introductory interest rates on non-rewards cards with a balance transfer, based on products on Canstar’s database.
|Credit card and balance transfer interest costs and monthly repayments required to pay off $10,000 debt in 12 months|
|Credit card type||Interest rate||Monthly repayment required to pay off debt in 12 months||Interest cost over 12 months|
|Average rewards credit card purchase rate||19.84%||$926||$1,107|
|Average non-rewards credit card purchase rate||13.65%||$896||$755|
|Average non-rewards balance transfer intro rate||1.47%||$840||$80|
|Minimum non-rewards balance transfer intro rate||0.00%||$833||$0|
|Source: www.canstar.com.au – 21/01/2020. Based on all personal, unsecured credit cards on Canstar’s database. Calculations exclude fees and assume balance transfer intro rate is available for at least 12 months.|
Current balance transfer interest rates for non-rewards credit cards on Canstar’s database are as follows:
Current introductory balance transfer interest rates
|Minimum, average and maximum balance transfer interest rates for non-rewards credit cards|
|Source: www.canstar.com.au – 21/01/2020. Based on all personal, unsecured non-rewards credit cards with a balance transfer facility on Canstar’s database.|
This means choosing a deal with a competitive introductory rate could make a big difference to your hip pocket.
It’s also important to understand the timeframe offered for the introductory rate and what your interest will be once it reverts to the normal rate. Ideally, you should generally work towards paying off your debt within the low or no-interest period, especially if your card will revert to a high interest rate. Some people may choose to transfer their balance to another card to take advantage of another introductory rate, but be aware that this could impact your credit score, there may be fees involved and there is no guarantee you will be approved for the new credit card.
The amount of time that an introductory rate will apply for can vary depending on the product. At the time of writing, the unsecured, non-rewards credit cards on Canstar’s database that offer a 0% introductory interest rate offer it for between six and 26 months, with the average being 13 months.
It is also a good idea to find out when the introductory period for a card actually starts, as it could be from the date you apply for the balance transfer or when the transfer actually occurs. This will impact the end date to any introductory offer.
Tip 2: Figure out why you’re in debt
If you are considering a balance transfer because you have high credit card debt, it could be a good idea to look at your spending habits to determine where you could save money. Transferring your existing debt to a lower-interest card might save you in the short-term, but unless you change your habits, you could end up back in the same spot or adding to your debt.
A good place to start could be in recording how much money you spend each month and where it goes, and then comparing this to your income. Here is a budgeting calculator that could help and you could consider trialling budgeting apps. If your spending exceeds your income, or you have savings goals you aren’t hitting, you can look at where your money has been going and consider where you could cut back. It could also be a good idea to speak to a financial adviser or other professional who can provide personalised advice for your situation.
Tip 3: Avoid using your card
Once you have a credit card for your balance transfer, it is typically a good idea to avoid using it for any further purchases. There are two main reasons for this:
Firstly, the introductory interest rate only applies to the amount you transferred across, meaning it is likely you’ll be charged a higher interest rate on any purchases you make using the credit card.
Secondly, usually the primary purpose of a balance transfer card is to reduce and eliminate debt and so the focus should be on achieving this. Adding further purchases to the card will add to your debts. Any repayments you make usually go towards the debt that is charging the most interest, which in most cases will be any new purchases, so this could set you back from achieving your goal of paying your existing debt down.
Tip 4: Factor in fees
Keep in mind that some cards charge a fee for transferring debt. On our database, over 30% of non-rewards credit cards that offer a balance transfer charge any balance transfer fee, so it could be a good idea to keep this in mind if you are considering a balance transfer card. Non-rewards credit cards on our database that do charge a fee usually charge about 1% – 2% of the amount you transfer.
Before you settle on any particular balance transfer deal, consider all fees and charges, which could include late-payment and account-keeping fees, and work out whether the savings made with the lower interest rate counteract these. You can find more information about a card’s fees and charges by reading the provider’s documentation or by talking to the provider directly. It is also a good idea to check whether your card will revert to a higher interest rate if you miss a payment deadline.
Tip 5: Reduce or stop spending on other cards
If you have debt you are currently paying down, it is normally wise to avoid building any further debt, including through other credit cards you may already have. It can be a good idea to think about cancelling any credit cards you no longer need (which could be impacting your credit score and ma be continuing to charge you fees) or placing any ‘emergency’ cards in a drawer at home to prevent using them.
Choosing the card provider
When you are looking for a credit card to use for your balance transfer, it is important to know that there could be some issues if you apply for one through a financial institution where you already have a credit card that carries debt. This can include other brands which share the same underwriter as your original card issuer – for example, the Westpac Group underwrites credit cards for Westpac as well as its subsidiaries St George, Bank of Melbourne and BankSA. If you are unsure who the underwriter of a particular credit card is, you can usually find this information in the card’s terms and conditions, or you can speak with the provider.
If you do apply for a credit card that has the same underwriter, you may still be approved, but the card provider may not offer you the low- or zero-interest introductory period normally attached to the card. Because of this, it is generally a good idea to speak with the provider of any credit card you are considering, to determine if you are eligible for the card as well as for the balance transfer offer.
Balance transfer limits
When you apply for a balance transfer, it is possible the credit card issuer will only allow you to transfer a portion of the total limit of the card. For example, if a credit card has a $5,000 limit and the provider has a cap of 80% on balance transfers, it means you can only transfer up to $4,000 of your existing debt onto the card. The provider may also have a minimum amount that must be transferred for you to be eligible for the card’s introductory balance transfer rate. You can generally find more information about limits in the card’s terms and conditions, or speak with the provider directly.
A balance transfer is not usually available immediately – it may take a number of weeks for the application to be processed and more for the funds to be transferred across. You may therefore want to factor this in when you are planning your budget. Keep in mind that the balance transfer period (and any introductory deals you received) could commence as soon as you are approved, which may be before you receive the physical card in the mail.
The high interest charged on some credit cards can be a significant obstacle for anyone trying to pay down their debt. If you find yourself with credit card debt, consolidating it with a balance transfer could be a wise decision, provided you work to pay off the balance during the low or no-interest introductory period. It is also a good idea to evaluate how you became in debt in the first place, to help determine how you may be able to make changes, and to avoid adding to your debt where possible.
Co-author: William Jolly