Balance Transfer Debt Consolidation: Tips & Traps

Balance transfer deals have now flooded the credit card industry. With so many offers available, what do you need to know before making a deal?

Debt consolidation by way of a credit card balance transfer is a popular option for many consumers. Financial institutions have responded to this, with approximately 135 balance transfer deals available in the marketplace.

A balance transfer credit card can help you pay off a credit card debt, so long as you choose the right balance transfer for you. The interest rate on one of these balance transfer cards tend to have much lower interest rate (also known as promotional or introductory rates) for a limited period of time.

Before you sign on the application form’s dotted line though, here are a few possible traps to be aware of – and some tips to help you find ways to save money by paying off your debt fast.

Compare Balance Transfers

Tips for a successful credit card balance transfer

Tips for making a balance transfer work for you include the following.

Tip 1: The introductory rate can be fantastic

The introductory interest rate for a balance transfer offer can range from several per cent all the way down to zero, with the average rate currently being 1.55% p.a. for non-rewards credit cards.

For someone with significant credit card debt, taking advantage of an introductory rate offer can save them interest in the short term. As an example:

Outstanding Debt Interest Rate p.a. Interest Cost Over 12 Months
$10,000 17% $1,555.93
$10,000 10.00% $887.85
$10,000 1.41% $120.64
$10,000 0.00% $0
Source: www.canstar.com.au

Assumes that only minimum monthly repayments (the greater of $25 or 3%) are made on the outstanding debt, no further purchase are made on the card, and there is no annual fee.

Current introductory balance transfer interest rates

Current balance transfer interest rates for non-rewards credit cards on the CANSTAR database are as follows:

Balance Transfer Rates on Non-Rewards Cards
Minimum 0.00% p.a.
Average 1.41% p.a.
Maximum 7.90% p.a.
Source: www.canstar.com.au

Rates current as at 31 March 2017.

For reference, the average introductory interest rate for balance transfers was 2.4% back in 2014 – so competition has certainly increased since then, resulting in better deals.

Look around for the best rate. According to our research there are 142 balance transfers available in Australia right now. It’s important to make sure you’re getting the best interest rate and terms you can, so you should definitely compare your options:

Compare Balance Transfers

Tip 2: Figure out why you’re in debt

Even having a balance transfer card is usually a sign that you have too much debt. Transferring it to a lower interest account might save you a little bit in the short-term, but unless you change your habits, you’ll end up back in the same spot again in no time.

Modifying your spending habits can eliminate the need for a balance transfer entirely. Meeting with a credit counsellor can help you create a budget and cut back on your spending.

Budget Planner Calculator – CANSTAR

Tip 3: Avoid using the card whenever possible

This one is the most straightforward tips we can give you: don’t buy anything using the balance transfer credit card! There are two reasons for this:

Firstly, interest will be charged on any purchases you make using the balance transfer credit card applies from the day you make the purchase, with no interest-free period. And the interest rate that applies is the purchase rate, which can be nearly 25% p.a..

Secondly, the primary purpose of a balance transfer card is to lower and eliminate debt, and putting new purchases on the card will merely add to your debts. Don’t shoot yourself in the foot.

Tip 4: Factor in the balance transfer fee

While there are some cards out there that allow you to transfer a balance for free, there are many that will charge you a balance transfer fee, which is usually about 1% – 3% of the amount you transfer. That can be a lot of money!

Whether or not your card charges a balance transfer fee, you can find the relevant information in the product disclosure statement (PDS). We strongly recommend you read the PDS and key fact sheet before choosing any particular card.

Tip 5: Cut up your other cards

This might seem a little drastic, and is mainly to be used as a last resort. You don’t actually need the card unless you plan on making purchases with it – which, if you’re in debt, is not a good idea.

You can also cut up your new balance transfer card, since tip 2 above says you shouldn’t make any new purchases with it anyway. This card should be used to strictly pay off debts. For the rest, there’s always debit.

How to improve your credit rating

Traps to avoid with balance transfers

Say for example a bank or financial institution offers you a balance transfer card with a promotional offer of 18 months. In order to make a profit, the lender is banking on you not fully repaying your debt within that timeframe. This leads us into the first pitfall a lot of people fall into:

Trap 1: Not paying off the debt during the introductory period

The rules for different cards can vary, but the interest rates that come after this promotional rate – the revert rate – can be as high as 30%! This is much higher than the interest rates on most regular credit cards, so you need to make sure you fully repay your debt before the low interest period finishes.

Revert Rate (% p.a.)
Minimum 7.99%
Average 18.58%
Maximum 21.99%
Source: www.canstar.com.au

Rates current as at 31 March 2017.

What’s more, if you make a repayment late on the balance transfer card – even a day late – the low interest rate will disappear and you’ll start paying the revert rate on the full balance of the card.

How much time will you have on average to repay your balance transfer? Well, 0% balance transfer deals range from 6 months up to 2 years, but the average length of the introductory period is:

Length
Minimum 5 months
Average 11 months
Maximum 2 years
Source: www.canstar.com.au

Rates current as at 31 March 2017.

You can avoid this trap by setting up an autopay function or reminder for a month or so before the introductory interest rate period will end.

Trap 2: Spending on the card

This one has also been mentioned, so it doesn’t need much explaining here – balance transfer cards are for eliminating debt, not adding to it!

Trap 3: Not factoring in the transfer fee

As we said before, the transfer fee will usually be about 1% – 3%. Depending on how much debt you have, you could end up paying more in fees than you would save, so be careful!

Read the terms and conditions very carefully, and do your research on heaps of different balance transfer cards. We can help you there:

 

Compare Balance Transfer Credit Cards

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