Balance transfer credit cards are financial tools that allow individuals to transfer their outstanding balances from one credit card to another, usually at a lower interest rate. This can help individuals consolidate their debt and save money on interest payments.
David Boyd, co-founder of Credit Card Compare, explains, "A balance transfer credit card can be used to consolidate a number of higher-interest debts onto a single card with a lower interest rate, typically 0% p.a. for a period of time that we call the introductory balance transfer period. During this time, money normally directed to interest payments can be used to pay down the balance instead. Usually there is a one-off balance transfer fee, which is typically a percentage of the amount being transferred (around 2-3% is common). Some offers may waive that fee. It's important to work out if a credit card balance transfer actually saves more money than the fee to do so, and, if it does, what the interest rate will be after the introductory balance transfer period ends."
How balance transfer credit cards work
Balance transfer credit cards work by allowing you to move the balance from one credit card to another. This is often done to take advantage of a promotional low or 0% interest rate for a specified period. Balance transfer credit cards help you pay off your debt faster and save on interest charges.
When you transfer a balance to a new card, you will usually be charged a balance transfer fee. It is typically a percentage of the amount being transferred. It's important to check the terms and conditions of the new card to understand the fees and any limitations that may apply.
What to know before applying for a balance transfer credit card
Before applying for a balance transfer credit card, it's important to consider the following factors:
- Interest rates: Understand the promotional interest rate period and the revert rate charged after the promotional period ends.
- Fees: Be aware of any balance transfer fees, annual fees, or other charges associated with the card.
- Credit limit: Ensure the new card has a sufficient credit limit to accommodate the balance transfer amount.
- Credit score: Your credit score will play a significant role in determining the approval and terms of the balance transfer offer.
What to consider when choosing a balance transfer credit card
- Compare offers: Research and compare multiple balance transfer offers to find the best deal for your financial situation.
- Consider the length of the promotional period: Look for cards with longer promotional periods to maximize your savings on interest.
- Check for hidden fees: Read the fine print to understand all fees associated with the card, including balance transfer and annual fees.
- Evaluate the revert rate: Ensure you are comfortable with the revert interest rate that will apply after the promotional period ends.
Andrew Boyd, co-founder of Credit Card Compare, explains, "It's tempting to use a balance transfer offer to save money, but not actually pay off the balance owed. If you only make the minimum repayment each month, you're doing nothing to pay off the balance owed."
Balance transfer benefits
Some benefits of using a balance transfer credit card include lower interest rates, debt consolidation, and savings on interest charges.
Save on interest
If you have a credit card balance of $5,000, with a purchase rate of 18%, and make $300 monthly payments, without any additional purchases, you will pay off your card in 20 months. However, you'll pay $796 in interest during that period.
By transferring your $5,000 to a balance transfer credit card offering 0% p.a. interest for 18 months, you can pay off your debt three months ahead and save on the almost $800 in interest.
Those carrying higher balances stand to save thousands with an interest-free balance transfer offer.
Pay off your credit card debt faster
You can pay off your debt faster when interest is not adding up month by month.
This is because your entire monthly payment goes towards paying off the principal amount. Paying more than the minimum repayment accelerates this.
Balance transfers can simplify your finances
Debt consolidation refers to taking out one facility to pay off a number of different balances. Consolidation makes debt management easier because you are less likely to lose track or miss payments. With an interest-free balance transfer offer, you can also reduce the total interest you end up paying.
They can reduce financial stress
Grappling with credit card debt can be very stressful, especially if you are struggling to keep up with repayments.
Transferring debt to a balance transfer card with low or no interest can help you relieve that stress and free up money to make progress towards getting out of debt.
May help improve your credit score
A balance transfer can lower your overall credit utilisation ratio, or the level (percentage) to which you are using your credit limit.
This matters because credit utilisation plays a role in determining your credit score.
