Tips for people considering balance transfer credit cards to consolidate their debt
Balance transfer credit cards are often touted as the saviour to credit card debt and it’s associated woes. In theory, a 0% balance transfer credit card deal should give you a period of time, in which you are charged zero interest as an introductory offer to save money.
People look to balance transfers as a way to consolidate debts, reduce their interest charges and often start a fresh new strategy to repay the debt once and for all.
While the theory of making more frequent and larger repayments while your card attracts 0% interest is a beneficial one, this is often not the case. Many credit card holders end up simply using the new card they transferred to in order to take on more debt.
So if you are considering a 0% balance transfer credit card or perhaps a 2% or 3% balance transfer for 12-18 months, here are some of the things you need to consider. The good, the bad and the ugly.
Why 0% balance transfer credit cards can be good
Balance transfers can be good for some people. If you are finding the interest rate on your current credit card too high, you may be struggling to meet the repayments and in particular, the interest charges themselves are stopping you from getting ahead on your credit card debt.
If this is the case, searching for a credit card balance transfer that offers between 0% to 3% interest is the way to go. Depending on the current offers available, there may not be a zero percent deal going which means you will need to explore a 2-3% balance transfer (that likely goes between 12 to 18 months). While not 0%, this is still often far less than a normal credit card rate of between 13-22%.
While this can be a good thing to help you get on top of your debt, remember that the balance transfer credit card small print will explicitly state that the low interest rate is a promotional offer only and will cease at the end of the agreed term. Once this period is over, be sure to check what interest rate the card will revert too – you don’t want to be stuck with a good deal that is followed by a terrible deal.
Oh and make sure that once you do a balance transfer, you increase the frequency of your repayments and try and up the amount you pay off in each hit. Your sole goal should be to repay as much debt as possible while it is under the balance transfer period. This will help you save money, save time and free yourself from debt.
The bad side of balance transfer credit cards
Once this balance transfer period is over your interest rate will revert back to a standard rate (and for some dodgy credit cards, an even higher rate). Remember, if at the end of the balance transfer period you haven’t repaid your debt, carefully check the new rate of interest and if need be – transfer to another card again.
You also need to be aware that purchases made on a balance transfer credit card often are done so at their normal rate, aka the higher rate. Following this, when you next make a repayment, the money you put on the card will go towards the balance transfer amount first, meaning your higher rate purchase is attracting interest charges for longer (in many cases).
An example of how purchases attract a higher interest rate on balance transfer cards:
- You transfer $5,000 to your new balance transfer credit card that gives you 0% interest for 12 months.
- You then make a purchase of $500 for some new clothes.
- You then pay $500 onto your credit card at the end of the month to repay the clothes purchase. Does this work? NO. The $500 pays off the balance transfer amount first.
The $500 purchase of new clothes continues to attract interest (at a higher rate) until you repay the initial $5,000.
The ugly side of balance transfer credit cards
People who apply for a balance transfer credit card with intent to use it to help them repay their debts, only to use the multiple cards ongoing and continue to rack up even more debt.
For example, you have a $10,000 balance on credit card #1. You apply for a 12 month balance transfer credit card and transfer the debt. This starts to save money by reducing interest. Instead of closing the old credit card (with an available balance of $10,000 now) – you leave it open and find yourself using it for everyday purchases.
All of a sudden you have two cards, two new balances and a hell of a lot of debt to repay. You think it won’t happen but it does.
The final word on balance transfer credit cards
If you are going to look at balance transfer deals there are some things you need to think about first.
Determine how long the promotional period goes for and make a plan to pay off the balance within this time period. If you don’t, you are going to get a rude shock at the end of the 12 months. Why are you transferring the balance anyway? The answer is likely to save money on interest. If you truly want to save money on credit card interest, repay the debt!
You also need to compare cards to figure out the best deal. You should be looking at annual fees, other charges and the promotional period – for instance, check that the annual fee doesn’t ruin the deal.
Always pay at least the minimum monthly repayments to avoid overcharge or late payment fees. Ideally you should be paying more than this to get rid of the debt fast.
DO NOT spend more money on the card. Keep it purely for your balance transfer because remember the higher interest charges are paid off after the balance transfer amount, costing you a tonne of money in interest.
Once you balance transfer your debt to the new credit card, cancel the old one.
Remember, like most offers on credit cards – if you use them wisely and as intended, you can save money and get ahead. If you become lazy or simply neglect your credit card after doing a balance transfer, you are falling even deeper into the rabbit hole of credit card debt.
Oh and at the end of all of this? Cancel your credit card and try and live without one. It’s inspiring how many people can manage without a credit card, why can’t you?