How to make the most of balance transfer introductory offers

Dumping debt: how to make the most of balance transfer introductory offers

  • Aussie consumers could have saved approximately $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate. 
  • When you sign up to a balance transfer card, you will be offered a lower (or even zero) interest rate for a fixed period of time, usually six, 12 or 24 months.
  • By creating a payment schedule and using your balance transfer credit card to reduce the interest you’re paying, an end date can come sooner than you think.

Aussies have more than 14 million credit cards, with outstanding balances of over $45 billion dollars. ASIC estimates that these consumers could have saved approximately $621 million in interest in 2016–17 if they had carried their balance on a card with a lower interest rate. We take a look at how low introductory offers on credit cards (promotional or honeymoon offers) can offer a smarter way for you to reduce debt and get ahead.

What’s so bad about having a credit card debt?

Crushing debt

Credit cards are handy, there’s no doubt about that. And when used effectively, to save interest (as you do with your home loan offset account), or to gain rewards points for travel, they can be a great tool to get ahead.

But the problem with credit cards is that they’re very easy to use and tempting to put larger purchases on. Unpaid balances often have high interest rates applied to them. Having a large debt on your credit card and only making minimum repayments means that the balance only goes down by a tiny amount each month. As a result, the debt can take decades to repay, with the total interest bill dwarfing the initial purchase price.

Putting all your spare cash into credit card repayments means less money is available for saving, investing or debt-free spending on things you do enjoy.

There are two key ways to manage your credit card debt: 

  1. Pay off the entire balance each month (this is great if you have an interest-free period on purchases), or 
  2. Look at transferring the balance to a balance transfer credit card with an introductory offer.

What is a balance transfer credit card with an introductory offer?

If your current credit card balance is more that you can clear in a month or two, then you might need to consider a balance transfer credit card. Balance transfer credit cards are normal credit cards, but they entice new customers to switch banks by offering a low introductory rate on existing debts.

When you sign up, you will be offered a lower (or even zero) interest rate for a fixed period of time, usually six, 12 or 24 months, and then a higher ongoing interest rate which kicks in at the end of this fixed period.

The bank may charge an upfront administration fee of around 1-3% of the balance transferred, plus an annual card fee. By taking advantage of the lower interest rate, often called a honeymoon or promotional rate, you can save big money on interest.

When used as part of a debt reduction strategy, switching your balance to a new credit card can save you thousands of dollars in interest, and give you an incentive to clear your debt for good.

How does it work?

how does it work

Balance transfer credit cards with an introductory offer are used to consolidate other credit card debt into one card. With one payment each month, it’s easier to manage your debts and save on fees and interest. Each bank has different rules, but usually you can only have a debt on your card up to a predetermined percentage of the approved credit limit (between 70-95%), to allow room for extra fees or charges.

The process of applying for a balance transfer credit card is the same as with any other credit card, but you will need to add in details of the amount you want to transfer across to the new account.

If your application is processed (usually within two weeks), they’ll pay out your debt and your new credit card account will be opened.

How to choose an introductory period that works for you

When deciding on your balance transfer card, you need to choose an introductory period. To work out which one suits you best, you need to calculate how much you can afford to pay off comfortably each month.

A rough calculation would be to divide your balance by the number of months the offer lasts for, to arrive at the monthly repayment amount.

For example, if you had $3,000 in debt, you would calculate:
 
6 months promotional period
$3,000 ÷ 6 = $500 monthly repayment to clear debt within 6 months*
 
12 months promotional period
$3,000 ÷ 12 = $250 monthly repayment to clear debt within 12 months*
 
24 months promotional period
$3,000 ÷ 24 = $125 monthly repayment to clear the debt within 24 months*
 
*Figures assume promotional period interest rate is 0% and that there are no upfront fees.

It’s important to choose a period that suits your budget, because after the promotional rate ends you’ll be charged a higher rate of interest on any remaining balance. Applying for another balance transfer at the end of the period will be marked on your credit history and could lower your credit score.

Who can benefit from an introductory offer?

who can benefit

You could benefit from moving your credit card debt to a balance transfer card if:

  • You are paying interest on your credit card each month
  • You wouldn’t be able to clear your entire card balance in the next few months
  • You have multiple cards and debts and find it difficult to manage all the due dates and amounts
  • You want to save money on fees and charges paid on multiple cards
  • You are looking for a way to consolidate your debts into one easy payment
  • You can clear the debt in the introductory period

Making the most of it

Imagine how amazing being debt-free would feel, with no constant management of due dates, minimum payments, paying from card to card to manage your cash.

By creating a payment schedule and using your balance transfer credit card to reduce the interest you’re paying, an end date can come sooner than you think.

Here are some (fairly painless) ways you can take control of your credit card debt:

Pay more than the minimum payments.
Paying the most you can afford each month will mean clearing your debt faster, and closing the account sooner than you expected. 

Set up automatic repayments.
Work out how much you’d need to be paying each month to clear the debt within the promotional period. If you can round this up a bit, you’ll get ahead even faster. When you set up automatic repayments you’ll be less tempted to reduce your payment if other expenses come up. 

Pay more than you need to when you can.
That $50 from Grandma for your birthday? You could buy take-away, or you could add it to your credit card payment. It’s worth the short-term pain of squirrelling away more money to pay it off when you can, and getting debt-free faster.

Stop using your other cards.
Yes, it’s tempting, and you might really need that new pair of sneakers or that shirt. But look at other options for paying for things like good old cash or lay-by. Sometimes knowing that you’ll be paying for that new purchase for months on end can be enough to make you question if you really need it right now.

Save the difference.
When you use our handy list of balance transfer credit cards, you’ll see how much you can save by switching, shown in the ‘Money saved’ column. Divide this amount by the number of months in the introductory period and put the resulting amount into a savings account each month. At the end of the introductory period, use your savings to pay off the balance. You won’t only have paid off your card, you’ll also have a tidy amount of interest income left over.

Consolidate more than one debt and close the other accounts.
This option is maybe not the most fun, but if you’re running more than one credit card you’re likely paying annual fees, charges, and possibly loyalty points program payments, several times over. Look at the details of all your cards and only keep the ones that will benefit you and that you can keep under control.

Are there other options? What about a personal loan?

personal loan

Personal loans are a great option to consolidate debts but are more restricted than a credit card. Many will penalise you for paying your debt off early, and there may be annual fees or other charges. The other downside to a personal loan is that it’s a once-off amount, so if you need credit later, you’ll be using your credit cards again.

Personal loans usually have higher interest rates than the introductory offers on credit cards, and no loyalty programs. But if you don’t think you could pay off all your debt during the introductory period, a personal loan might save you overall when compared with a credit card’s introductory low interest, followed by high interest after the promotional rate period ends.

How do I find a great introductory offer on a balance transfer card?

With so many factors to consider, it can be hard to work out which card is offering a good deal. Sometimes a lower interest rate comes with a higher administration fee, or annual fees which can wipe out the potential savings.

Fortunately, we’ve done the hard work for you by setting out the balance transfer interest rate, purchase rate, annual fees and how much you’ll save, here.

Can I get a little extra to go on holiday at 0% interest?

Vacation mode

It’s very tempting to add a little buffer to your transfer amount for upcoming expenses or to have some fun. Remember that it’s still debt though, and will need to be paid off at the end of the day.

Check with your bank to see if you can add more than the amount of the debt on an existing card or cards. If you use your balance transfer credit card for purchases during the introductory period, you’ll start paying the purchase interest rate from the date of the purchase transaction. This is because the unpaid balance transfer debt temporarily cancels out your interest-free days on purchases. And if you take a cash advance from your card, you’ll always start paying interest immediately.

Can I get rewards points for transferring a balance?

Most lenders don’t consider a balance transfer as a purchase, so wouldn’t apply loyalty or shopping points to a balance transfer. But a few lenders will offer points as an incentive to transfer your balance. When evaluating the points offers, consider how much the points are worth in dollars, and the cost of the balance transfer fees. The usual fee of 1-3% can add up to $150 on a $5,000 debt, so you’d need a lot of points to outweigh that.

When looking for the right card to transfer your balance to, focus on: 

  • the interest rate, 
  • fees, and 
  • introductory period.

Can I get a balance transfer offer? What are the criteria?

criteria

The usual lending criteria will apply, so if you are already maxed out on all your other cards, and the bank finds that you couldn’t maintain repayments on another card, you might be refused. In that case, it would be worth a visit to your bank to see how they could help you.

What are the downsides?

Clearing your debt, getting ahead with your savings, low interest rates–it all looks great. There are some downsides to be aware of, though.

  • Most cards don’t extend the promotional rate to purchases made after the account is opened. So if you use the card, you’ll pay the usual purchase interest rate, and may not get an interest-free period.
  • It can be tempting to keep your old card and use it. While it’s good to have a backup for emergencies, make sure you’re clearing the balance each month to save on interest.
  • Applying for multiple credit cards can decrease your credit rating, especially if you’re not approved, or you apply for a lot of cards in a short time.
  • If you’re already at or near your maximum credit limit, you may not be able to transfer all your debt.

Why you should take control of your debts

Taking control of your debt is the first step to being free from high interest payments and getting ahead with your savings. Balance transfer credit cards offer a solution to high interest rates that can help you clear your current debt faster by reducing your interest cost and giving you an incentive to pay it off sooner.

Want to know how much you could be saving on your credit card? Check out the latest balance transfer options today.

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