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Do balance transfers really work?

How you can balance transfer out of debt.

The difficulty of working out how much money a balance transfer could save was preventing one free-spending Sydneysider from applying for a new credit card. He’d heard about balance transfers and the promotional balance transfer offer of 0% for 12 months sounded good, but it had an annual fee $20 more than the $79 he was already paying.

He had a $3,127 balance on his existing card, where he was being charged 19.74% p.a. in interest. This meant that his monthly interest bill of around $52 was gobbling up most of his minimum monthly repayments of $62, and he felt like he was getting nowhere.

Running the numbers was easy with our balance transfer calculator. After entering a few details, he made the happy discovery that over 12 months he could save $605 in interest and reduce his balance owing to $2,476, just by making the 2% minimum monthly repayments.

The new card's revert interest rate was 21.74% p.a. So his plan is to avoid it by paying off as much as he can each month, now that every cent of his repayments will be reducing the balance instead of paying interest on it.

This case study is intended as a representative example.

Questions about our balance transfer calculator

Who should use the balance transfer calculator?

Anyone who is thinking of applying for a balance transfer to a new credit card with a promotional interest rate offer. The calculator will work out how much interest they will save, and by how much their debt will reduce.

What is a credit card balance transfer?

A credit card balance transfer occurs when you request the transfer of the amount owing, on a credit card you already have, to a new credit card for which you are applying. In most cases the reason for the transfer is because the new card is offering an interest-free or low-interest period on transferred balances (e.g. 0% interest for 12 months). This allows you to save a large amount of interest cost on a credit card balance where you may have been paying between 12% p.a. and 21% p.a. in interest charges.

What is a balance transfer promotional interest rate?

It's a low (or even zero) interest rate offered to applicants for a new credit card. The interest rate will be applied to any balance transferred from the applicant's existing credit card to their new credit card, but only for the period specified in the offer (e.g. 0% for 12 months).

Why do card issuers offer promotional interest rates on balance transfers?

An interest-free or low-interest balance transfer offer is just a part of the package of goodies designed to encourage you to apply for a new card instead of sticking with your old one. Other sign-up incentives may include bonus rewards points, cashback incentives and interest-free or low-interest periods on purchases. The new card issuers hope that you will stick with your new card, so that they can earn income from fees charged to merchants when you make a purchase, and possibly from interest you may have to pay in future if you do not clear your balances by the due date.

Are balance transfers risk-free?

No. There are three main risks to be aware of.

Before, or as soon as, the interest-free or low-interest period expires, you need to pay off the full amount of the transferred balance in order to avoid the revert interest rate. This is the interest rate that will be applied to any remaining amount of the transferred balance once the introductory interest rate (often 0%) no longer applies. The revert interest rate is in most cases very high. It will often be the same as the interest rate applied to cash advances, and could be as much as 22% p.a.

Secondly, when you have any outstanding balance on your credit card, including a balance transfer, you will lose your interest-free days on purchases unless there is also an introductory 0% interest rate on purchases accompanying the balance transfer offer (e.g. 0% for 12 months on balance transfers plus 0% for six months on purchases). Interest at the prevailing rate – up to 21% p.a. – would be applied to every purchase, from the purchase transaction date until full repayment had been made.

Finally, if you continually chase balance transfer offers by repeatedly apply for new cards within a short time frame, you risk doing damage to your credit rating.

Are there any costs associated with balance transfers?

Yes. Many credit cards apply an upfront balance transfer fee. It is calculated as a percentage (usually between 1% and 3%) of the amount being transferred. If the balance transfer were 2%, you would pay a $60 fee on a transferred balance of $3,000. The fee will appear as a charge on your credit card.

Remember that you will pay the revert interest rate (often the equivalent of the high cash advance interest rate) on any balance unpaid after the balance transfer offer expires.

Also take into account the annual fee on the card to which you are transferring your balance. It could be higher than the fee you are paying on your existing card.

Compare the purchases interest rate on your old and new cards as well. If you end up paying interest on a balance on your new card once any introductory interest rate offers have expired, it could be at a higher rate than you are paying on your existing card.

Although not strictly a cost, but a repayment that is reducing your debt, bear in mind that you will be required to make a minimum repayment of your transferred debt each month, in order to avoid being in default and also paying an often high late payment fee.

How much can I save by making a balance transfer?

This depends on a number of factors:

  • The amount of debt you are transferring from your existing card or cards
  • The interest rate on your existing card
  • The introductory interest rate being offered by the new card (often 0%, but sometimes a low rate such as 2% p.a.)
  • The length of the introductory offer on the new card
  • The annual fees charged by your old and new cards
  • The monthly minimum repayment percentage on your new card
  • Whether you intend to make just the minimum repayments, or larger repayments

Clearly, with this number of variables the calculation is going to be quite complicated, but our Balance Transfer Calculator can do the hard work for you.

For example, Laura has a credit card debt of $2,750 on a card with a $90 annual fee charging her 19.99% p.a. interest. She is thinking of applying for a new card with a balance transfer offer of 0% for 12 months (minimum repayment 2% per month) and a $150 annual fee. After entering these values into the Balance Transfer Calculator she learns that she will save $539 in interest charges and reduce her debt by $510 to $2,240.