Balance Transfers 101
So you went a little overboard over the holiday season and you’ve racked up a hefty credit card bill. We’ve all been there, there’s nothing to be ashamed about. If you can’t or don’t pay off the balance in full by the due date, you might have to pay interest on your debt and some credit cards carry interest rates up to 20% p.a.!
You’re probably thinking: I don’t want to pay all that interest! Help! What can I do???
First step, don’t panic. There are many options that can help you minimise the holiday debt hangover. One option is to take advantage of a balance transfer offer. Let’s go over the basics.
What is a balance transfer?
A balance transfer lets you take the balance you owe on an existing credit card and transfer it over to a new credit card.
What’s the benefit?
Balance transfer offers often come with a special interest rate that lasts for a specific period of time. For example, a credit card provider might offer you 0% p.a. for 12 months on balances transferred. Why pay 20% p.a. in interest when you can pay zero?
That sounds too good to be true. What’s the catch?
Yes, okay. Nothing is ever that simple. Below are a few things you should watch out for when you’re looking at balance transfer offers:
- How much can I transfer?
There are usually minimum and maximum amounts that a credit card provider allows you to transfer to a new card and the maximum amount is often expressed as a percentage of your approved credit limit.
- What is the revert rate?
As we talked about earlier, the special interest rate you receive only lasts for a certain period of time. If you haven’t paid off your balance by the end of the honeymoon period, your interest rate will revert to either the purchase rate or the cash advance rate, both of which can be much higher.
Make sure you come up with a plan to pay off your debt before the end of the honeymoon period.
- Do I have to pay a fee?
There are some credit card providers that charge an upfront balance transfer fee. The fee can range from 1-3% of the balance you’re transferring. For example, if you planned on transferring $10,000 over to a new card with a balance transfer fee of 1%, it will cost you $100.
Keep an eye out for deals that don’t charge any transfer fees.
- Can I keep spending on my new card?
Best practice says no. When you continue to spend while paying off a balance you lose the benefits of having interest free days. Why is this? Well, interest free days only apply if you pay off your balance for the previous month in full. If you’re in the process of paying off your debt, you’re always going to have a balance outstanding and any purchases you make will incur interest from day one. So keep that new credit card locked away until you’ve cleared your debt.
- Do I have to switch credit card providers?
Usually. Most credit card providers have in their terms and conditions a requirement that the balance you are transferring must come from a different credit provider. Remember to always check the fine print and read through all the terms and conditions before applying for a new card so you’re not caught out.
- Will this affect my credit score?
Possibly. Each time you apply for a credit card, your lender can do a credit check on you. This will show up as an enquiry on your credit file and can impact your credit score regardless of whether your application is approved or declined.
Don’t apply for every new credit card deal you come across. Be picky and only apply for credit if and when you really need it.
Ready to start comparing? Head over to our credit card comparison service to see the latest deals. Or if you want to learn more about credit cards, you might like to read our article: Cutting through the jargon: Credit Cards.