A credit card balance transfer is a form of transferring your existing credit card debt to a new credit card with a lower interest rate for a certain period of time. The aim is to completely pay off your credit card debt during that low interest rate period.
However, if you don’t pay off the debt before the end of the promotional period, you will get charged a higher interest rate. The revert rate on balance transfers – the interest rate that your new credit card reverts to once the introductory rate is finished – can be shockingly high.
According to our research, revert rates among the 177 balance transfer deals on the market can range from anywhere between 11.99% p.a. and 21.74% p.a. (as of November 2016).
Pros and cons of balance transfers
The pros and cons of balance transfers
As shown in this pros and cons table, there are many benefits and limitations to a balance transfer. Before you consider getting a balance transfer, make sure you understand all your other options for debt consolidation.
The pros of balance transfers
You can take advantage of a lower credit card interest rate
Transferring your existing balance to a lower interest rate card will have a much bigger impact on your credit card debt, and you may even be able to pay it all off entirely.
You can move your balance to a credit card with better terms
Unhelpful terms and conditions on a balance transfer can include things like high hidden fees or a short promotional fee. You can move your balance to a different account and close the old one.
You can consolidate your credit card debt
You can move the balances of multiple separate cards onto a single one. It is easier to pay off all of your debts when they’re all in one place.
You have a set timeframe to repay your credit card debt
Balance transfer cards are used for paying off debts, with a set timeframe where low or no interest is charged on the debt. You can actually cut up the physical card when you get it, since you shouldn’t be using it to buy anything.
The comparison table below provides a snapshot into the current market offerings for credit cards that feature balance transfers with links direct to the providers website. Please note that these have been sorted by purchase rate (lowest to highest) and are based on a $2,000 monthly spend. You can try this tool for yourself here.
The cons of balances transfers
You can end up with a much higher interest rate
Once the promotional rate expires, the interest rate on the card will instantly skyrocket to the revert rate, and they often become more expensive than regular credit cards. Banks are counting on you not paying off your balances on time, so make sure you don’t miss the deadline!
They can be expensive
A lot of balance transfer credit cards charge a balance transfer fee as well as the usual annual fee. The transfer fee is usually between 1% and 3%.
Before you transfer your balance, you should factor in the cost of moving your balance. It might actually cost you less to just leave it on your old card.
Balance transfers can hurt your credit score
Your credit rating take a hit whenever you open up a new card with a balance that is over 30% of the card’s limit. Your credit score can drop if the new card you choose doesn’t have enough available credit, but timely repayments should alleviate this penalty fairly quickly.
You’re opening yourself up to more debt
Suddenly having more credit available to you can be too tempting for many. So as per our 4th point in the ‘Pros of balance transfers’ section, you’ll need to exercise a good deal of restraint if you want to avoid your debt problems getting worse.
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When should you consider getting a balance transfer?
- You have a credit card debt on which you are currently paying interest
- You can find a 0% p.a. interest rate for longer than 12 months
- The annual fee is not too high
- You know you can afford to repay the entire debt within the 0% promotional period
Then you also need to cancel your old card, and not make any new purchases on the balance transfer card. If you cannot repay the debt within the promotional period, you will need to switch to another balance transfer or Low Rate card to finish repaying it, to avoid the revert rate.
However, simply shifting your money to another card – even on a lower interest rate – is a short-term interest rate relief option, not a cure for chronic overspending habits. A balance transfer would be a bad idea if you transferred your balance to a new card and then run up the debt on your original card as well!
Do I need a balance transfer?
We can’t answer that question for you, but ask yourself the following questions…
- How large is my balance?
- How much can I afford to repay each month?
- Is there a balance transfer card that can offer me a long period with a 0% interest rate?
- Will I be able to pay off my credit card debt before the end of the promotional period?
- Am I likely to stick to my budget for repaying the debt?
- Are the fees reasonable?
- Will I be able to limit the use of the balance transfer credit card so as to not acquire any extra credit card debt?
- What are my intentions for using the card once I have paid off the debt? Keep it or close it?
You should consider how transferring the balance of your credit card debt will affect your finances in the long-term. If you will ultimately save money and pay off your credit card balance faster, then transferring the balance should be worth it. Always make sure you read the Product Disclosure Statement (PDS) and terms and conditions before making a purchase decision.
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