A balance transfer credit card allows you to transfer the outstanding balance from one or more of your current credit cards to a new credit card with a lower interest rate. The primary objective is to pay off the existing balance more quickly while saving on interest charges.
Certain credit cards come with balance transfer offers, which provide a reduced interest rate on the transferred balance for a specific 'balance transfer period'. The most competitive balance transfer deals offer a 0% interest rate, with balance transfer periods typically ranging from six months to two years and sometimes even longer on select cards.
Once the introductory period ends, any outstanding balance on the new credit card will be subject to the standard credit card interest rate. It's important to note that balance transfers can be made using either personal or business credit card balances.
When considering a balance transfer, it's essential to compare the available offers and carefully review the terms and conditions to ensure you select the most suitable option for your financial situation.
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."
What to consider before applying for a balance transfer credit card?
Most people apply for a balance transfer credit card to repay their credit card debt in a short period of time. However, it's crucial to be realistic about your ability to repay the transferred amount within the low or 0% interest period. If you can't clear the balance in this time frame, you might face higher interest rates, potentially increasing your financial burden.
Here are some things to consider before applying for a balance transfer credit card to make an informed choice.
Interest rate
The low or 0% introductory interest rate on the card typically lasts from six months to two years. Make sure you review the interest rate that will apply once the promotional period ends to avoid any unpleasant surprises.
Fees and other charges
Be aware of any balance transfer fees, annual fees, or other charges associated with the card. Some credit card providers may charge you a percentage of the amount being transferred (commonly around 2-3%), which could add to your costs.
Credit limit
Ensure the new card has a sufficient credit limit to accommodate the balance you intend to transfer.
Credit score
Your credit score plays a significant role in determining your eligibility for a balance transfer offer and the terms you're likely to receive.
Debt management
A balance transfer credit card can help you manage your credit card debt by potentially saving you money in interest charges. However, a balance transfer credit card is typically useful for those who can commit to timely repayments. Missing payments can lead to penalties and hurt your credit score
If you're in serious financial trouble or struggling to manage your debts, transferring your balance to another credit card may not be the right solution for you. Consider seeking help by contacting the National Debt Helpline or visiting the MoneySmart website for more information on debt and financial hardship management.
Features to look for when comparing balance transfer credit cards
Before applying for a balance transfer card, ensure you choose the one that best suits your financial needs. Research and compare multiple balance transfer offers to find the best deal for your situation.
- The introductory interest rate: Choosing the lowest possible introductory rate can help reduce the interest charges on your transferred balance during the offer period.
- The length of the introductory offer: The duration of the low or 0% interest rate period typically ranges from a few months to a couple of years. A longer promotional period could give you more time to repay your balance without incurring interest.
- Revert rate: The revert rate is the interest rate that applies after the promotional period ends. Knowing the revert rate is crucial if you cannot repay the balance within the promotional period, as it will impact your future repayments.
- Balance transfer fee: This refers to the fee charged to transfer your balance. It is usually a fixed amount or a percentage (1-3%) of the balance transferred. Finding a low or waived balance transfer fee can help ensure that the costs do not offset the interest savings.
- Annual fees and other charges: A low or no annual fee card could help reduce overall costs, especially if you plan to hold the card long-term. It is also worth comparing other potential charges, such as any late payment fees or foreign transaction fees, to understand the real cost of the card to you.
- Interest-free days: Most cards offer a certain number of days where you are not charged any interest on purchases. However, balance transfer cards typically don’t offer any interest-free days on new purchases.
- Rewards and benefits: Some credit cards may offer additional perks like cashback or travel rewards. You may want to check whether a card offers any extras, and if you need to pay any additional fees for these features.
How to do a credit card balance transfer
Transferring your credit card balance to a new card can take anywhere from a few days to three or four weeks, depending on the card issuer and the complexity of your application.
1. Determine the balance transfer amount
Calculate the total amount you need to transfer to your new balance transfer credit card. You can usually transfer balances from multiple cards if necessary.
2. Verify your eligibility
The new credit card will have specific eligibility criteria you must meet, including income requirements and a minimum credit score. Make sure you review these criteria before applying. Consider checking your credit score beforehand to assess your chances of approval.
3. Apply for the credit card
Research and compare various balance transfer offers and apply for the one that best fits your financial needs. The application process is generally quick, but your approval could take several days. When submitting your application, you’ll most likely need to provide details about the balance transfer amount and the existing credit card provider(s). You’ll also need to provide information about your income and expenses and include proofs such as your payslips and bank statements.
4 Activate the new card and close your old account
Once approved, your new provider will assist you in setting up online banking, enabling you to manage your card from your mobile device. If the balance on your old card has been fully cleared, consider closing the account entirely to prevent any further spending or incurring fees.
Should you do a credit card balance transfer?
A credit card balance transfer can be an effective strategy for managing and paying off debt when used wisely. Balance transfer deals often feature low or 0% introductory interest rates for periods typically ranging from a few months to a couple of years. This can significantly reduce your interest charges and help you pay off debt faster. By transferring your high-interest credit card balance to a lower-rate card, you avoid incurring additional interest on the transferred balance, allowing your entire repayment amount to go towards reducing the debt.
However, using a balance transfer card requires financial discipline. Any remaining balance at the end of the promotional period will revert to a much higher interest rate, known as the revert rate. This rate can be higher than the standard purchase rate on your current card, and can significantly increase your debt burden if the balance is not fully paid off within the promotional period. Additionally, most balance transfer cards do not offer interest-free days on new purchases. Therefore, it is crucial to avoid new spending on the balance transfer card and aim to pay off the balance within the promotional period to avoid high revert rates.
It is also important to note that a credit card balance transfer does not eliminate your debts; you still have to repay them. The only difference is that your debt won’t incur interest with a 0% interest rate balance transfer card if you don’t make any new purchases. If you are struggling with money or finding it hard to manage your debts, consider seeking assistance from a financial counsellor. Ultimately, while balance transfers can be effective, they require disciplined financial management to ensure they serve their intended purpose and help you get on top of your debt.
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."
Benefits of a balance transfer credit card
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. If it starts affecting your mental health, seek help if needed with the National Debt Helpline, who offer anonymous assistance.
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.
