Is it just me or does each year fly past faster than the last? Already we’re heading into the festive season, and for plenty of Australians that inevitably means giving their credit card a solid workout over the weeks ahead. If your card balance is looking a little unmanageable at present, a balance transfer deal can provide some relief – though be sure to watch out for the downsides.
Balance transfer deals involve paying out your existing card with a new one charging a low rate or even zero interest. These deals have become more generous over the past year, with research group Canstar saying there are currently 23 credit cards charging zero interest for 12 months – in some cases even longer, on debts transferred.
Zero interest can sound like a compelling offer. The thing is, it’s critical to read the fine print to know exactly what you’re signing up for. As a starting point, it pays to be very clear that the low or zero interest rate you see advertised normally only applies to the debt transferred. New purchases can attract interest rates topping 20%.
If it’s likely you will put fresh purchases on the card in the run up to Christmas, aim for a balance transfer deal that incorporates a low rate on purchases. For example, Heritage Bank has a card combining zero interest for 12 months on balances transferred, with 11.8% on new purchases plus no annual fee. The Australian Defence Credit Union offers a credit card with no interest on transfers for 12 months, with a rate of 10.99% on new purchases and a $49 annual fee.
Importantly, do the sums to be sure you can realistically pay off the debt transferred within the interest-free period. If you don’t, any of the original balance that remains outstanding can attract the card issuer’s cash advance rate, and that’s often a lot higher than the rate applying to purchases.
A key pitfall is that there is also no guarantee a balance transfer deal will clear the slate on your old card. The amount you can transfer from your old to new card may be capped at 80%-95% of your credit limit – a figure that is determined by the issuer of the new card. This could see you still stuck with part of the old card debt and paying two sets of fees – plus now having two credit cards. If that happens, pay the old card off as soon as you can, then cut it up. If you’re in this situation, having one credit card is more than enough.
The bottom line is to think carefully about a balance transfer offer. Don’t dive in solely on the basis of marketing hype that focuses on zero interest because while there is scope to save on card interest, there is also potential for your overall debt position to go from bad to worse – if you end up with two credit cards carrying debt.
For more on balance transfer deals take a look at my book Free Yourself From Debt.