Co-author: TJ Ryan
What is a balance transfer?
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. This lower interest rate is often a promotional rate, and you need to pay off the debt before the end of the low-rate promotional period or you could risk being charged a high interest rate and late fees.
Balance transfers are a good way of paying off debt if you choose a low interest rate with enough time to pay it, however many people fall into the trap of continually transferring their debts to different cards, incurring unnecessary fees and affecting their credit rating.
Of course, you also need to ensure that you won’t be charged a high fee for the initial balance transfer, make sure you cancel your previous credit card, and not make any new purchases on the balance transfer card (to prevent your debt growing). So before going ahead, it’s really worth considering if a balance transfer is right for you.
If you’re using a balance transfer to pay off a debt and need help to be smarter with your money, check out more information on budgeting here.
— Canstar (@CANSTAR) November 16, 2016
How does a balance transfer work?
Essentially you are transferring your debt balance from credit card A to credit card B. You’ll need to know the amount you want to transfer and the details of the credit card account to transfer to. Your lending institution will then go ahead with your balance transfer and pay the amount indicated, which could take up to a few weeks depending on who you’re banking with. It’s a good idea to make any payments due at that time before this process in order to avoid any late fees.
What type of balance transfer deals are available?
Canstar compares 180+ balance transfer options, so it’s definitely worth doing some research to compare your options.
The table below displays a snapshot of credit cards on Canstar’s database with 0% balance transfer, with links to providers’ websites. The products and Star Ratings displayed are based on a monthly spend of $2,000.
Hidden costs involved with balance transfers
Balance transfers can often sound like the easy option when paying off a debt, but there are a few things worth considering first.
Here are some of the hidden costs involved in balance transfers:
- The credit card interest rate: the reversionary interest rate is the interest rate that the card switches to after the introductory or honeymoon period. This rate can often be right up in the top end for credit cards, of more than 20%. If the card has a high reversionary rate and you haven’t paid off your debt by the time the low-rate ends, you may need to look at other options.
- The credit card transfer fee: balance transfer fees are one potential trap you need to keep your eyes open for, as these fees can amount to up to 3% of the amount being transferred. That’s a big chunk of money you don’t want to be added to your debt.
- The credit card annual fee: If you’re looking at a 0% balance transfer deal for something crazily long, like 2 years or more, you might assume you’ve struck a great deal. But these credit cards with a long interest-free timeframe may well charge a higher annual fee. So depending on how much you transferred, the saving you made on interest may wipe out your fee.
At the time of writing, annual fees on balance transfers range from $0/year up to $700/year.
Assume someone has a debt of $5,000 and can afford to pay $200 a month towards it. What would be their options?
- Transferring the debt to a 2-year interest fee card with a high annual fee could actually be the most expensive option.
- A less expensive choice could be to take a 12-month interest-free deal with no annual fee and a high revert rate.
- An even less costly choice could be to take a standard low-rate card with a low annual fee.
|Card condition||Annual fee||Revert||Time to repay||Total cost|
|0% for 24 months||$200||21.75%||2 years, 5 months||$5,638|
|0% for 12 months||Nil||19.99%||2 years, 3 months||$5,354|
|No interest free period||$36||7.99%||2 years, 5 months||$5,607|
|Source: www.canstar.com.au Based on a repayment of $200 per month on a starting debt of $5,000.|
Is a balance transfer a good option for you?
There a number of factors to consider when answering this question, including; your financial situation, spending profile, the likelihood of making purchases during the debt paying period and whether you intend to keep the card after you’ve paid off the debt.
Ultimately, the decision on whether to balance transfer or not will depend on your own calculations of the costs and benefits of the particular situation. Make use of Canstar’s free comparison table to compare different balance transfer deals that are available and find the best option for you.