Credit Cards

Credit card transfer deals  

Count your credit cards and store cards?  Do you have a collection?  What interest rates apply to each? 

If you struggle to pay credit card debts, consolidating these debts can be a great way to save on interest and make management easier.  If you are using a card that has a high rate of interest, transferring to a low rate card can achieve big savings.  You might even be offered an 'interest holiday'.  Some banks will give you up to six months interest free on transferred balances.   

What is a Balance Transfer? 

A balance transfer involves transferring the debt from one credit or store card to another card.  For example, you might use a new low-rate Visa card to pay the balance on your old Mastercard.  Used correctly, balance transfers can facilitate big interest rate savings. 

Example: 

You have an American Express with a $2000 balance, a NAB Mastercard with a $3000 balance, and a Commonwealth Visa with a $1000 balance.  Your debt is $6000. All cards have interest rates above 20.7% per annum. 

You apply for a Low Rate Mastercard with a 0% balance transfer rate for six months and an 11.75% purchase rate. 

You ask your new card provider to transfer your Amex and Mastercard debts.  Now you owe $6,000 on your new card, and $0 on the old cards.  (You can cut those old cards up!).  If you can pay $1000 per month off your new card, you have only one payment to make each month, and you will pay no interest at all.  You will save nearly $400. 

Hidden traps 

If you struggle to manage debt, balance transfer offers should be treated with caution.  There are hidden traps. 

It is important never to use balance transfers to increase debt or your access to credit.  For example, applying for a new low-rate card and transferring a higher rate card balance will only increase debt problems if you retain your old high rate card and run up more debts on it!  The idea is to consolidate debt and reduce the number of cards in your wallet, not increase your access to credit. 

There are other traps to watch for.  For example, spending on a new card after transferring a balance.  This causes problems because different interest rates apply to different types of transactions.  Repayments always go to clearing the debt you transferred first.  That's a decision your credit card company makes, because they want to clear the balance to which the lowest interest rate applies first.   Usually, any reduced or 0% interest rate offer only applies to the transferred balance.  If you spend on the new card, a higher interest rate applies for purchases, and since your repayments go to paying of the transferred balance, the new debt continues to accrue interest at high rates.  While you struggle to pay off old debt, new debt is growing rapidly!  Avoid this problem by applying for two new low-rate cards to replace your old high-interest cards.  Transfer all old balances to one.  Use the other for spending, and make sure it has a low credit limit. 

Card companies get up to all sorts of tricks to encourage you to spend in ways that increase their profits.  Some offer reward points.  They offer short term 0% deals on any spending.  Ignore these offers!  Never, never, never spend on a card after you have taken up a balance transfer offer to reduce your interest costs - at least, never until you have cleared the old balance completely and your card balance is $0! 

Another trap to watch for is penalties for late or missed payment.  With some cards, you can lose your eligibility for the discounted transfer interest rate if you miss a payment or are late paying.  Paying just one day late could mean your interest rate increases from 0% to as high as 18%!   

Transfers and Your Credit Rating 

Balance transfers can affect your credit rating.  Generally speaking, the best way to achieve a strong credit rating is to pay your debts promptly.  But if you are transferring a card balance, it might be wise to consider how the transaction will impact on your credit rating.   

Debt percentage is calculated by comparing the balance on a card with the card limit.  If your balance is $2500 and the card has a $5000 limit, your debt percentage is 50%.  If you transfer to a card with a limit of only $3000, your debt percentage increases to 83%.  If you transfer to a card with a $10,000 limit, your debt percentage reduces to 25%.   

Some lenders calculate your credit rating based on the total balance of all cards.  Others look at the debt percentage for individual cards.   

Of course, while a low debt percentage might be an advantage, a high credit limit can be a dangerous temptation.  The safest way to ensure a healthy credit rating is to make regular payments of an amount sufficient to reduce your overall level of debt, and resist the urge to spend more than you can genuinely afford. 

Comparing Offers 

Comparisons of credit card offers can be tricky!  While it might be easy to compare the interest rate offered, there are all kinds of fees, reward offers, and fine print cautions to consider.  The length of the interest free period can make a big difference to interest costs.  You also need to check if a balance transfer fee applies, and how that fee compares to the interest rate saving you expect to achieve. 

For those with a poor credit history, it might be difficult to access some transfer offers.  Your choices may be limited to companies that are a little more lenient. 

Credit cards often come with a range of bonus benefits such as free travel insurance, extended warranties on purchases, free insurance on purchases, and discounts on selected products.  These benefits can add up to huge savings.  Some card holders find that cashing their reward points for store vouchers cancels out all their credit card fees and interest costs.  Others, however, find that reward points just tempt them  to overspend and get them into trouble! 

6 or 12 Month Balance Transfer Offers 

Some balance transfer offers require you to repay the transferred balance within six or twelve months of the transfer date.  These may offer a lower interest rate than 'transfer for life' offers.  Usually, the longer the repayment period allowed, the higher the interest rate, so if you can budget to pay the debt quickly, select a card with a lower rate.  Remember, though, that you can't claim reward points until you have completely paid off your transferred balance. 

Balance Transfer for Life 

'Transfer for Life' card offers let you take as long as you need to repay the transferred balance.  Interest rates are typically higher, but the biggest drawback for those who struggle to manage debt is that the incentive to pay off your balance is reduced.  Sometimes, it's better to know that you have to pay that debt, even though it might be a struggle sometimes.   

0% Balance Transfers   

Many card companies try to buy business by offering a special 0% introductory interest rate for up to six months on balance transfers.  You will typically have to pay an annual card fee up-front, but if you eliminate the interest on a debt for six months, the savings can be huge.    

2nd Balance Transfers 

Some card providers do allow you to make multiple balance transfers, but watch for traps.  Card companies use a scoring system to rate customers.  Those who appear unable to manage card debt capably are more likely to have future card applications rejected or be offered low credit limits. Your rating can affect your overall credit rating, and thus your ability to access loans for other purposes. 

How do you Choose the Best Deal 

Good credit card wqebsites provide information on what to look for when selecting a transfer deal, and 'at a glance' comparison charts to help you compare different features.

Remember that you should usually be choosing two new cards when aiming to transfer from a high rate card:  one for future spending, and one for repaying the old balance.  That makes it considerably simpler to choose.  It means that the key feature to compare when selecting a card for your balance transfer is the balance transfer rate.  The cash advance rate and interest free period don't matter for your balance transfer card, because you won't be using it to make cash withdrawals or new purchases.   

Choosing a card for ongoing purchases is a little trickier.  The interest free period, card fees, cash advance rate, purchase rate, annual fees, and reward programs all impact on the total cost and value of a credit card.  You should also consider the reputation and service levels of the supplier.   The credit limit offered can be an important consideration too, but if you struggle to manage credit card debt, go for a card with a lower limit and avoid the temptation to have multiple cards.  Keep one for spending and try to pay the full balance every month, plus make a payment off the card that holds your transferred balance. 

A final word of advice:  once you have paid out that old balance, resist the temptation to overspend on credit cards again.  Make it a habit to pay the full balance monthly whenever possible, and if you can't pay the full amount, budget to pay the balance off as quickly as possible and reduce your spending until the balance is back to $0.  Credit cards are a wonderful convenience, but they present a major hazard for the undisciplined spender! 

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