What is a balance transfer credit card and how does it work?

What is a balance transfer credit card?

A balance transfer credit card allows you to transfer your credit card debt from an existing card to a new one, generally with a lower or even 0% interest rate. This may help you pay off your debt as you may only incur a low amount of interest or no interest at all for a set period of time.

How does a balance transfer credit card work?

A balance transfer credit card works by offering borrowers a lower interest rate, often only as a promotional rate for a set period of time, in order to incentivise them switching credit card providers. While this may sound appealing, it’s important to keep in mind that you’ll need to pay off the transferred debt before the end of that promotional period or you could risk being charged a high interest rate and late fees when the rate reverts.

Balance transfers can be a useful way to help you consolidate and pay off your credit card debt, as long as you choose a low interest rate and give yourself enough time to pay off the debt.

It’s important to note, however, that If you apply for a balance transfer several times in a short period of time, it could affect your credit score. If you’ve transferred your credit card balance once already, it might be better to pay off the debt first rather than transfer it again to another credit card. This could be seen by lenders as you being unable to manage debt, which could make you a less desirable candidate for credit.

When comparing balance transfer credit cards, it’s important to consider any upfront costs, to avoid being stung with a high fee for the initial balance transfer. According to Canstar Research, these fees can be between 1%-3% of the balance. It’s also important to remember to cancel your previous credit card, so you’re not being charged fees attached to a card you’re no longer using.

Any new purchases you make on your new balance transfer credit card will likely be charged at a higher interest rate than any promotional transfer rate, and may also be exempt from any interest free days. It’s therefore important to check with your new card provider where any repayments you make on your credit card debt actually go.

As the Federal Government’s Moneysmart website points out, if your repayments go to paying off the new purchases first, instead of the balance you transferred, you won’t get the full benefit of the transfer.

Before going ahead with any credit card balance transfer, it’s worth considering whether or not a new credit card is actually suitable for you. If you’re already struggling with repayments there may be other options to help get your debts under control. You can also seek free, independent, confidential financial counselling by contacting the National Debt Helpline on 1800 007 007 or via its website.

How to do a balance transfer?

If you do opt for a balance transfer credit card, you’re simply transferring your debt from credit card A to credit card B. You may want to consolidate the debt from other credit cards too, if that’s possible.

You’ll need to know the amount you want to transfer and the details of the new credit card account where you want the debt to go. There may be a limit on how much you can transfer, so check with your credit card provider first.

You can then contact your original credit card provider who will then go ahead with your balance transfer once you provide them with the necessary details of the new credit card account. The transfer could take up to a few weeks depending on the provider you’re with.

Before you begin this process, it’s a good idea to make any payments that are due around that time, in order to avoid any late fees, and to ensure that all direct debits that are linked to your old card have been transferred to your new one.

Once the balance transfer is done, check with your new credit card provider to see all is as you expected. Check any statement to see what amount is listed and any reduced or 0% interest rate, as well as the expiry date on the promotional rate.

It’s up to you to cancel your old credit card or cards. If you still have any outstanding balance on your old credit card you will need to keep up with any repayments.

What do balance transfer credit cards cost?

Balance transfer credit cards can often sound like a straightforward option to help you pay off a debt, but there are a few important factors you need to consider. There are a number of fees and costs that may be involved, and you need to consider the normal interest rate that will be charged once any promotional period is over.

• The credit card interest rate: The revert rate is the interest rate that the card switches to after the introductory promotional period. If the card has a high revert rate and you haven’t paid off your debt by the time the low-rate period ends, you may need to look at other options.

• The credit card transfer fee: Credit card balance transfer fees are one potential trap you need to keep your eyes open for, as these fees can be up to 3% of the amount being transferred. That could amount to a big chunk of money you might not want to be added to your existing debt.

• The credit card annual fee: If you’re looking at a 0% balance transfer deal for up to two years or more, you may think you’ve struck a great deal. But these credit cards with a long interest-free timeframe may charge a higher annual fee. So depending on how much you transferred, any savings you make on interest may be wiped out by these fees.

If you’re considering any credit card balance transfer it’s always wise to do your own research into what credit card offers may be available at the time, what repayments you may be able to afford and what kind of deal best suits your repayment style and timeframe.

You can compare balance transfer credit cards with Canstar. It’s important to read any relevant documentation, such as the Product Disclosure Statement (PDS), Target Market Determination (TMD) and Key Facts Sheet, for any credit card you’re considering.

Is a balance transfer credit card a good option?

There are a number of factors you need to look at when considering a balance transfer credit card. These include your own needs and financial situation, spending profile, the likelihood of making further purchases during any low or 0% interest promotional period, and whether you intend to keep the credit card after you’ve paid off the debt.

The decision on whether or not to use a balance transfer credit card will depend on your own calculations of the costs and benefits of your particular situation.

If you do decide to go ahead, Moneysmart suggests you should aim to pay off the credit card debt before any promotional interest rate ends.

What type of balance transfer credit card deals are available?

There are plenty of options to choose from if you’re looking for a balance transfer credit card. Canstar compares 100+ balance transfer options, so it’s definitely worth doing some research to compare your options.