Breaking it down: What actually is a balance transfer credit card?

Breaking it down: What actually is a balance transfer credit card?

  • A balance transfer credit card allows you to consolidate one or more credit card debts into one card and one monthly payment
  • When used as a debt reduction strategy, balance transfer credit cards can help you save thousands of dollars in interest payments
  • Shop around to find one that suits you, cards offer different time periods, interest rates, transfer fees etc

In today’s busy world there’s so much to balance in life. Having multiple credit cards and due dates makes it hard to keep track of everything. A balance transfer credit card is one way to consolidate your debts into one easy monthly payment. We explore how you can take advantage of a balance transfer card’s low promotional or honeymoon rates to reduce your debt with minimal interest.

What is a balance transfer credit card?

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Balance transfer credit cards offer an introductory deal for you to switch your existing debt to a new card. They normally come with a low rate for a promotional period, (sometimes called the honeymoon, or introductory rate) for around six, 12, or 24 months. This switches over to a higher interest rate (called the ‘revert rate’), which will be applied to any balance remaining after the end of the promotional period.

A balance transfer credit card allows you to consolidate one or more other credit card debts into one card and one monthly payment. You can transfer any existing credit card balances with Australian financial institutions (but not usually to a new card issued by the same institution). The promotional interest rate can help you to reduce your debt quickly, especially if you can pay off the entire balance during the promotional period.

How much can I transfer?

Because fees and charges may be added to the card, generally you’ll only be able to transfer about 80% of the total credit limit on your new card. If your existing debts are $3,000, that will mean you’ll need a credit limit of around $3,750 on your new card.

Do balance transfers affect my credit rating?

the answer is yes

Yes. Every time you apply for credit in Australia, it’s noted in your credit history. It’s recommended that you know what is on your credit report before applying for another card. When you apply for credit, the financial institution will access your credit history to make sure you can make the repayments and to assess your creditworthiness.

How do I know what to look for and how can I compare my options?

We know the frustration of trying to compare features, rates and introductory periods across several lenders. That’s why we’ve compiled a handy comparison tool that allows easy comparison and sorting of credit card features. Simply enter what you currently owe, the interest rate and fees, how much you want to transfer, and we’ll calculate the rest.

Easily compare:

  • Balance transfer fees
  • Interest rates
  • Purchase rates
  • Total savings

How do I use a balance transfer credit card?

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Once you’ve decided you’d like a balance transfer credit card, you can start shopping around to find one that suits you best.

Work out how much you can pay off in the honeymoon period. If your balance is $10,000 and you have a 12-month interest-free period, you’ll need to make a payment of around $850 a month, every month, to clear the debt.

Some cards offer longer periods, with a minimal interest rate, and might be more suitable for your individual circumstances. Our balance transfer calculator can help you work out the payments you’d need to make.

Do I need to go to the same bank that my current debts are with?

No, and most banks won’t let you open another credit card and transfer the balance internally. This isn’t a bad thing, as it means you can shop around and get the best deal.  It’s a good idea to check your current bank’s rates as a starting point to make your comparisons.

From time to time, your existing bank might send you an offer to transfer your balances. You can see how their offer stacks up against their competitors using our balance transfer comparison page.

In some cases, banks will only offer the introductory rate to new customers, but it’s always worth asking if they’ll extend it to you if you have existing accounts with them

How do I apply?

I don't know how

Once you’ve chosen your deal from our easy-to-use comparison page, you can start the process with one click.

This takes you straight to your chosen card’s application form, where you can enter your details. It will help speed up the process if you have your documents ready to enter the information.

You’ll need to have

  • Identity documents (such as passport, birth certificate, driver’s licence, marriage certificate)
  • Evidence of your income–payslips and notice of assessment from the ATO
  • Evidence of the debt
  • Details of the accounts you want paid out
  • If you are applying for a joint card (with a partner for example), you would need all the documentation for both of you.
 Once you apply, most banks will process your application in around two weeks.

What are the advantages of a balance transfer?

When used as a debt reduction strategy, balance transfer credit cards can help you save thousands of dollars in interest payments. The sooner you pay off your card, the faster you can start saving money and getting ahead.

Having a set monthly amount that you know you need to pay to clear the debt in the promotional period means you’ve got an incentive to make it happen. Seeing how all those little purchases have added up over time is also an incentive to cut back on spending and look at your needs versus wants.

If you have multiple credit cards that you use in rotation, it can be difficult to manage all the payment dates. Consolidating them into one easy monthly payment might be a better option for you. You can even set your monthly payments up as an automated direct debit so there’s no temptation to reduce the amount you pay each month.

If you have multiple credit cards, you’re probably paying multiple annual fees, points program fees and other charges. Reducing these down to one card is a great way to save money.

What should I watch out for?

watching out

There are some precautions to take when adding another credit card to your wallet. If you transfer a debt, it’s a good idea to consider closing the other card account, especially if you’re paying fees on it.

Make sure you clear the debt during the introductory period. Once the promotional period is over, the interest rate will increase, and you might be left worse off.

It can be tempting to keep all your current credit cards active and keep spending on the old card now that it’s back to zero. While there’s nothing to stop you doing that, try to clear the balance every month so it doesn’t start to build up again.

Keeping multiple cards open can mean paying more than one annual fee, or points program fee, so make sure you’re choosing to keep the cards that are beneficial and close any that aren’t working for you. Closing your other cards can mean you miss out on loyalty and shopping points programs too though, so make sure you check which has the most advantages for you.

If you don’t manage to clear the full debt before the end of the introductory period, you’ll find the interest rate switches to the purchase or cash advance rate for the balance of the debt. That could mean paying even higher interest than before.

It’s important to remember that you can only borrow up to your personal credit limit.  Credit limits are calculated on your capacity to pay back your debts and consider all credit you currently have. They also look at the available credit on existing cards, even if you don’t owe anything on them. You might not be able to move all your debt at once. Clearing the highest interest rate debt first will help you move ahead faster.

Sounds obvious, but you’ll need to be making more than the minimum repayments to clear the debt in the introductory period. Breaking the total payment down into monthly payments will ensure you’re not left stressed and scrambling for money at the end of the introductory period.

There is usually an administrative fee when setting up a new credit card with a balance transfer. Include this in your caluclation, as well as considering how much you’re paying in interest per month, and see if it’s worthwhile switching and how much you can save.

Can I use the credit card while I’m paying off the transferred balance?

Yes, you can. But you should be aware this will slow down the process of paying off your debt sooner. With most cards, you’ll temporarily lose your interest-free days on purchases while the unpaid balance transfer remains on your account. So, using the card for purchases, or cash advances from an ATM, might mean that your purchases will be subject to a high interest rate, starting from the date of each purchase transaction.

Be sure to read the terms and conditions for the individual credit card you are applying for, so you understand how interest works on new purchases.

Why should I consider a balance transfer credit card?

why gif

Balance transfer credit cards are a great option to consolidate debts to a lower interest rate if you can clear the debt in the introductory period. Having one payment per month means it’s easier to budget for and manage your credit card debt.

If you’re looking for a way to gain back control of your credit card debts, and stop paying high rates of interest, balance transfer credit cards are a great option. When you transfer your balance, you can save thousands over the potential lifetime of the debt. This means you can get ahead with savings faster.

By using our handy calculator, it’s easy to see how much you can save, and shop around to find the best deal.

Tips for managing your balance transfer credit card

  • Before the end of the introductory period, review the interest rates, fees and charges you’ll be paying in future–then compare to make sure you’re still getting the best deal
  • If you change to another credit card, close the balance transfer card to save fees and charges, or reduce the credit limit so it’s not tempting to use it
  • Pay off as much as you can, as soon as you can, to clear the debt
  • Set up automatic payments for each month so there’s no temptation to just pay the minimum.