Making a balance transfer work for you
If your credit card debt is getting out of hand, a balance transfer deal could be a good way to clear your debt and get your finances under control. But, with one in three Australians actually increasing their debts with a balance transfer, you need to pay it off within the promotional period, or you could end up losing even more money and increasing your financial stress.
Our tips will help you take advantage of balance transfer deals so you can avoid the debt trap.
What is a credit card balance transfer?
A balance transfer is a way of moving some or all of your credit card balance from one card to another. The debt you move to the new card attracts a lower interest rate (or even no interest) for a certain period (called the promotional or honeymoon period).
At the end of the promotional period, any transferred debt you haven’t repaid will attract higher interest.
Read ASIC’s media release about our review of credit card lending in Australia, to find out why balance transfers can be a debt trap and how card providers can help people better manage credit debt.
Three steps to winning on a balance transfer deal
Here are the three simple steps to use a balance transfer to get your debts under control.
Step 1: Cancel your old credit card
The best way to avoid temptation and going further into debt is to cancel your old credit card as soon as the balance is transferred. The sooner you cancel your old card, the more likely you’ll avoid the debt trap.
Step 2: Set up a repayment plan
You’ll only get the full benefit of a balance transfer deal if you pay off the amount you’ve transferred within the low interest period. If you don’t, there’s real danger you’ll get further into debt, as you could be paying higher interest than you were on your old card.
Step 3: Don’t use your new card until the balance transfer is paid
Pay off the transferred balance before you make any purchases with the new card. Remember, the promotional low interest rate only applies to the balance you’ve transferred from your old card; any new charges will usually attract a higher interest rate.
Remember that payments you make to reduce your balance are usually applied to the highest-cost debt first. This means you’ll be paying off the new purchases before the balance transfer amount. If this is the case, you may never get the full benefit of the transfer and will only add to your credit card debt.
Avoid the temptation to spend on your new card by leaving it in a drawer at home, rather than in your wallet. You won’t be able to use the card if you don’t have it with you.
Set up your repayments as automatic transfers from your bank account to your credit card each payday until the promotional period ends.
Things to know before you get a balance transfer
If you research your options and plan ahead, a balance transfer deal can be a good way to get on top of your debts. But there’s more to a balance transfer than just a temporary low interest rate, so be sure to weigh up all the features before you move your debt.
Read the fine print of the terms and conditions to make sure you understand the following features:
Balance transfer start date – For example, does it start from the date you apply for the transfer, the date the card is approved or the date the transfer occurs?
Fees and charges – Make sure the savings you can make with the lower interest rate won’t be wiped out by other charges. Consider things like: account-keeping fees, fees for reward schemes, late payment fees, international transaction fees, and cash advance fees. Some credit card providers also charge a ‘balance transfer handling fee’ when the new card is set up.
Interest rate on new purchases – Items you buy with your new card will usually attract the standard interest rate of the new card (not the promotional interest rate). Check the card’s terms and conditions to see which rate applies.
Conditions on ‘interest-free days’ – Some credit cards give you a certain number of interest-free days in which to make repayments after you make a purchase. But, if you have a balance transfer amount owing on your card, the interest-free period may not apply. This means you will be charged interest from the date you make a new purchase. Check whether you’ll get an interest-free period while you have an outstanding balance transfer.
Promotional period end date – Most promotional periods on balance transfers are for between 6 and 18 months. Find out when your promotional period will end, so you can set up a plan to pay off the debt before then.
Standard interest rate after the honeymoon period – Credit card transfer deals usually revert to a high interest rate at the end of the promotional period. Check the new card’s terms and conditions for information about the interest rate that applies once the offer expires.
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