Balance Transfer Credit Cards Explained
The availability of early access to retirement pensions, the lack of places to spend money and lower consumer confidence have seen Australians repay $ 6.3 billion in credit since the start of the pandemic COVID-19, according to figures released by the Reserve Bank of Australia.
And if you’re one of the people looking for a better way to pay off your credit card debt, one option is to transfer that balance to a new credit card from a provider that offers competitive balance transfer. .
How does a credit card with balance transfer work?
A balance transfer credit card refers to the process of transferring the balance of an existing credit card debt to a new credit card.
These are often offered by credit card companies to attract new customers.
To sweeten the deal, these lenders usually advertise a balance transfer agreement for a certain “honeymoon period”. The new interest rate on the balance you moved can be zero percent (or a special low rate) for a limited time (can range from six months to 30 months), depending on the provider.
Credit card balance transfers are ideal for consumers who want to transfer the amount they owe to a credit card that offers a significantly lower promotional interest rate and with potentially better perks or rewards.
Is there a limit to the amount of balance I can transfer?
Most credit card companies set minimum and maximum credit limits for balance transfers.
Typically, the new credit card provider will require a balance transfer of at least $ 500 per request and you are allowed to transfer up to 80% of the credit card limit. For example, if you have been approved for a credit card with a limit of $ 10,000, you can transfer the balance up to $ 8,000 to the account.
Can you also make a balance transfer on a personal loan?
If you are trying to pay off other types of loans, it is also possible to transfer other debt to a credit card with balance transfer.
In Australia, there are several credit card providers that allow customers to transfer the balance of a personal loan debt to a credit card. This includes Citi, Coles, Qantas Money, and Virgin Money.
But remember that most other credit cards that offer zero percent balance transfer rates will only allow you to transfer debt from other Australian credit cards, store cards, or charge cards.
Other types of loans that can be transferred include auto loans and home equity loans. However, keep in mind that policies differ from bank to bank, so be sure to read the credit card terms and conditions before doing so.
What are the benefits of a balance transfer?
- To save money. The most obvious benefit is that balance transfer credit cards give you the opportunity to save a lot of money if you pay a low or no introductory interest rate. At the time of writing, the average standard credit card rate was 19.94%, according to the RBA. This means that you could potentially save hundreds of dollars over a year by deferring your debt to a zero percent deal.
- Debt consolidation. Another benefit of debt transfer is that you can consolidate your debt, which makes it easier for you to make your monthly payment. Plus, you will only have to manage one interest rate for all of your debts if you choose to transfer all of your loans to one credit card.
- Pay off your debt faster. When you pay little or no interest on a balance transfer card, that means more of your repayments go directly to principal debt rather than interest charges. This means that your debt will be paid off faster.
- Longer balance transfer offers. Credit cards with balance transfer offer introductory period interest rates of up to six months (or more often more). Depending on the amount of your outstanding balance and the monthly payments you can afford, you can pay off your personal loan debt before the end of this period and thus avoid higher interest charges.
Things to Consider Before Getting a Balance Transfer Credit Card
Like any other financial product, there are things to consider before deciding if a balance transfer credit card is right for you.
- The length of the introductory period. You can get the most benefit from a balance transfer if you pay off the full amount of debt before the end of the low or no balance transfer period. This is the ideal scenario. Remember that beyond the “honeymoon phase” or at the end of the introductory period, the promotional low interest rate for balance transfers will revert to a standard variable rate. Try to pay off your balance before this rate applies. If you don’t feel that you can pay off the balance during the introductory period, it may be best to stick with your current provider or check out other debt consolidation strategies to find an option that’s right for you.
- Impact on your credit score. Did you know that every time you apply for a credit card it can impact your credit score? Although one application does not have a great effect, doing multiple applications in a short period of time can hurt. Before applying, be sure to check if your credit score is good enough to be approved.
- Balance transfer fee. While an overall balance transfer rate of zero percent is tempting, keep in mind that some providers charge a one-time balance transfer processing fee, which is typically around 1 to 3 percent of the total debt that they charge. you transfer.
- Closing your old account. Once the debt is transferred to your new credit card, be sure to close the previous loan account to avoid additional fees or charges. It will also help you avoid the temptation to take on more debt.
- Expenses during the introductory balance transfer period. If you swipe your new balance transfer credit card on any purchase, the standard purchase rate will apply to these charges. Any repayments you make will go to those debts before your balance transfer debt. If this happens, you could end up keeping the balance until the introductory period is over. So, before you use your card to spend, try to focus on paying off your existing debt.
Transferring your loan balance to a credit card should be used as a tool to pay off debt faster and save more money on interest without hurting your credit score.
After understanding the fine print of the terms and conditions, doing your math before applying, and establishing a realistic payment plan, taking advantage of a competitive balance transfer agreement can be a good financial decision.