Balance Transfer Credit Cards

Is your credit card debt getting out of hand? You’re not alone – more than one in six Australians are struggling with their own credit card debt, according to ASIC.

You may be considering a debt consolidation loan, selling your possessions or fleeing the country. If you properly utilise a balance transfer though, you can clear your debts quickly, paying very little or no interest and saving yourself from drastic action.

What is a balance transfer credit card?

A balance transfer, as the name suggests, is the process of moving your credit card balance, including debts, from one card to another. To incentivise making the switch, many Australian providers offer balance transfer rates. These are much lower rates, often 0%, that occur for a limited period, known as the honeymoon or promotional period. The length of this promotional period varies between providers. Some are as quick as three months, while others can last over two years.

When you balance transfer your debts, you give yourself the honeymoon period to pay off these debts at a significantly reduced or eliminated interest rate. After this time though, the interest rate will revert, often to a far higher rate.

Example: Lorne Mower transfers his credit card debt

Lorne Mower has over $3,000 worth of credit card debt built up, and he’s struggling to pay it off. His current card has an interest rate of 17%, and at his current rate of repayments ($150 a month), it’ll take him two years to pay off this debt and will accrue nearly $500 extra in interest charges.

He can’t quite afford to pay off more than this yet, but he finds a balance transfer card that’s offering 0% interest for 24 months – the length of time it’ll take him to pay off his debts. He opens this card and fully pays his debt off within the promotional period. Therefore, he pays not a single cent in interest.

1. Length of promotional period

We’ve covered this already and for good reason. The promotional period is what makes balance transfers attractive, so the longer you can have interest free debt, the better. It’s rarely cheap to have debt, so any time you can have it for free is golden.

2. Balance transfer rate

Many providers offer a 0% balance transfer rate. There are other cards on the market though that do charge an interest rate on balance transfers, but these are generally below 5%. Obviously the lower the interest rate, the more you save, so you may want to look for a 0% rate for the best value. 

3. Balance transfer fee

A balance transfer fee is a percentage-based fee charged when you transfer your existing debt to a new card. The fee is typically 1-3% of the balance transfer amount. So for example, if you’re transferring $10,000 and are charged a 2% balance transfer fee, the new debt on the card will be $10,200 (2% of $10,000 equals $200 which is the fee, plus the balance transfer amount). 

4. Purchase rate

It’s generally not advised to use your new credit card for purchases, as it makes the whole balance transfer effort a bit pointless. However, if you do expect to make some purchases with it, make sure you’re getting a low rate; you don’t want to be paying through the nose in interest during your supposedly interest-free period. 

5. Revert rate 

The revert rate is what the debt on your card will be charged at, should you still have any at the end of the promotional period. It’s generally higher than the purchase rate, even up to double in some cases, so you should aim to pay off your debt before you have to encounter this rate. 

6. Annual fees

Annual fees on balance transfers can range from nil to $400. It’s easy to forget you have to pay to use the credit card, especially if you’re caught up with low rates and long balance periods. But if you’ve got a 24-month promotional period with an annual fee of $400, that could negate your savvy interest-free efforts. 

Is a balance transfer credit card a good move?

Balance transfers can offer an effective method of dealing with short-term debts, as long as you pay it all off fully within the time period and don’t make any purchases with that card.

But they’re only really a short-term solution. Long-term, you’ll need to look at how you got into so much debt, and what you can do to prevent it from happening again. It might be that you have an unsuitable credit card for your spend level or have an interest rate that’s too high. Or maybe you just spend much more than you should. If that’s the case, let old habits die hard!

There are also several traps you can fall into with a balance transfer. You’ll want to familiarise yourself with these before you do anything as they can mean you end up in a worse position after the transfer.

Whatever the reason, Savings.com.au provides practical tips and tricks to minimise your credit card spend and boost your savings instead. You can access these tips by reading our articles on balance transfers and other types of credit cards.