If you have existing credit card debt, you are likely paying too much interest. A balance transfer deal could potentially help you to pay less interest over an extended period of time, often with 0% interest for 12 months or more.
Transfer your existing credit card balance to a new, lower interest credit card at 0%
It is also a chance to make extra credit card repayments and pay down your debt while the interest charges have halted or slowed.
Example of how much money you will save doing a balance transfer
For example, if you had a credit card at an interest rate of 17% p.a. with a balance of $10,000 – moving to a 0% interest balance transfer deal for 12 months would see you save around $1,644. That is over $130 per month in interest you will save over a full year.
Infortmation on balance transfer credit cards
What is a balance transfer card?
A balance transfer card allows you to transfer your current credit balance onto a new card at a lower rate of interest (normally). Often a balance transfer card will offer an introductory rate that gives the balance a zero or low interest rate for an extended period of time. For instance 2% on the balance for 12 months or better yet, 0% interest for 12 to 15 months.
Who are balance transfer cards often for?
Often for people in credit card distress or who are paying unreasonably high fees and interest on their current card. Unless your credit rating is sterling, it can be difficult to qualify for a low interest balance transfer card it is said.
They are often popular with people who have finally realized they need to get on top of their credit card debt and wish to take advantage of zero to little interest for a number of months.
How can a balance transfer credit card help you?
A balance transfer card might be just the thing you need to get your finances back onto the straight and narrow. If you need some breathing space, being able to pay off debt without having to worry about interest for a couple of months might be exactly what the doctor ordered.
All the money that you’re putting towards interest can then head towards paying off the balance instead.
What are the common problems with balance transfer cards?
The interest rate may go back to the cash advance rate
Of course, there is no such thing as free lunch. Once your 6 month period (or whatever) has expired, you’re likely to be paying at quite a high interest rate or a similar rate, sometimes as high as the cash rate.
You fail to repay the debt and get into more debt
Also, depending on how you intend to use your card, most people take our a balance transfer credit card in order to pay less interest and get ahead on their debts, however some end up transfering the debt only to spend even more on their new card.
There is also a fee to move the balance onto the balance transfer card, which needs to be factored into your budget when considering this option in some cases.
Balance transfer credit card ‘hopping’
Due to the number of cards offering 0 percent balance transfer deals there have become a number of financially savvy consumers ‘leapfrogging’ from one card to another. These people have become serial balance transfer fanatics and are now more colloquially known as ‘card tarts’. When the 0% period is drawing to a close they will immediately start looking around for a similar offer, from one of their current card’s competitors. This can be a great way of making sure that you pay as little as possible in the way of interest.
Unfortunately credit card companies are growing wise to this kind of behaviour, and are now applying charges to those who make balance transfers. These fees vary from card to card, but the standard rate is around 3% of the total balance that you intend to transfer in some cases. Even with this fee it maybe something worth considering if you are unable to pay off your balance in full within the offer period.
Note that most cards will still charge you the annual fee upfront so make sure you will still save money on interest even after this fee.
Balance transfer tips and tricks to save
- Put everything into paying off the balance of the credit card before the interest-free period elapses. Even if you can’t quite pay it all off, you’ll have reduced the capital on which interest in calculated significantly.
- Ensure you’ve consolidated your other cards into the one card. More than one credit card is a slippery slope, so ensure you haven’t moved your balance onto one card only to start putting new purchases onto your old card
- Understand how balance transfer cards work. Any new purchase on that card will be charged at the standard rate, so it’s best to only commit to a balance transfer card if you can live off cash for a while.
So how do you go about applying for a balance transfer credit card?
Most cards will make you request the balance transfer amount upfront in the application process. You cannot forget to request the balanace transfer and retrospewctively request it from the bank once your card is issued.
You also need to check whether the credit card provider has a maximum percentage of card limit open to balance trasnfers. You might have a card with a $10,000 limit and only be allowed to transfer 75% of that available limit to the card (e.g. $7,500) which may leave you short on your other card.