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

If you have a credit card, then chances are you’ve heard of the term ‘balance transfer’. But what does that mean? So let’s explore what a balance transfer is, how it works and what types of deals may be available to you.

What is a balance transfer credit card?

A balance transfer credit card is a card that can be used for what’s known as a credit card balance transfer. This process involves transferring your debt from an existing credit card to a new one, generally one with a lower or zero interest rate to help you to pay off the debt.

This lower interest rate is often only a promotional rate for a set period of time. You 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.

Balance transfers can be a useful way to help you pay off a credit card debt if you choose a low interest rate with enough time to pay the debt.

But the federal government’s Moneysmart website warns 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 it suggests it might be better off to pay off that debt rather than transfer it again to another credit card.

Read more: How will a balance transfer affect my credit rating?

You should also make sure you won’t be charged a high fee for the initial balance transfer, and remember to cancel your previous credit card.

Any new purchases you make on your new credit card will likely be charged at a higher interest rate than any promotional transfer rate. You should check with your new card provider where any repayments you make on your credit card debt actually go.

As Moneyspart 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.

“If you limit your spending, you can focus on paying off the balance faster,” it adds.

So before going ahead with any credit card balance transfer, it’s really worth considering whether or not it’s right for you. If you’re already struggling with repayments there may be other options to help get your debts under control.

If you’re using a balance transfer to pay off a debt and need help to be smarter with your money, check out our budgeting information. You can also seek free financial counselling for your situation by contacting the National Debt Helpline on 1800 007 007.

How to transfer a credit card balance?

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 first to see if that works for you.

If all is okay then contact your original credit card provider who will then go ahead with your balance transfer once you provide them with all the necessary details of the new credit card. The transfer could take up to a few weeks depending on which 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.

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 and 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.

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Are there any costs with balance transfer credit cards?

Balance transfer credit cards can often sound like an easy option to help you pay off a debt, but there are a few things 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 saving you make on interest may be wiped out by fees.

So let’s take a hypothetical example of someone with a debt of $5,000 who can afford to pay it off at $200 a month and avoid making any purchases on the new card.

Canstar Research has crunched the numbers on a few of their options, including two with different annual fees and 0% interest over a set period before the higher revert rate kicks in, and a third option with just a relatively low interest rate .

Repaying $5,000 credit card debt with $200 monthly repayment

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Source: www.canstar.com.au – 6/12/2022. Based on personal, unsecured credit cards on Canstar’s database. Based on a repayment of $200 per month and a starting debt of $5,000; annual fees are not capitalised. Total cost includes repayments, interest and annual fees.

Transferring the debt to a 24-month (two-year) interest free card with a high annual fee could actually be the more expensive than the 12-month option, and neither fully clears the debt during the promotional period so both incur some interest at the revert rate on the outstanding amounts. That’s why you’d be wise to budget to clear the transferred debt during the promotional period.

But note, both transfer options in the example above may still save you money than if you’d opted for a standard low-rate card with a low annual fee, and made no additional purchases.

If you’re considering any credit card balance transfer it’s always wise to do you own check with what credit card offers may be available at the time, and what repayments you may be able to afford.

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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 deal.

These include your 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.

You can use Canstar’s free comparison table to compare different balance transfer deals that are available on our database to see what option may suit your needs.

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.

“Set a payment reminder in your calendar so you don’t forget,” it adds.

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 140+ balance transfer options, so it’s definitely worth doing some research to compare your options.

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Original reporting by Ellie McLachlan and TJ Ryan.

Cover image source: Farknot Architect/Shutterstock.com