A credit card balance transfer occurs when an amount of debt is transferred from an existing credit card or store card to another card held by the same cardholder. In theory, most Australian credit cards are balance transfer credit cards, although some cards specifically exclude a balance transfer option. Where balance transfers are allowed, in the absence of an introductory interest rate offer the transferred balance immediately begins to incur interest charges at the card’s purchases or cash advance interest rate.
But most references to a balance transfer credit card assume that the card receiving the transferred balance has a special introductory offer of a zero or very low interest rate on the transferred balance for a specified period, usually between six and 24 months, occasionally longer. On this page, the term ‘balance transfer credit card’ refers to cards with that type of introductory offer.
Save heaps in interest charges
The obvious attraction of a balance transfer credit card is that it allows you to save a large amount of money by avoiding high interest charges on existing credit card debt for a prolonged period. This is particularly beneficial if the debt is sitting on a card with an interest rate of 20% p.a. or more, before being transferred.
An opportunity for debt consolidation
Many people use a balance transfer credit card to consolidate their debts, particularly high-interest debt. If you choose a card which allows you to make a balance transfer from multiple credit or store cards (and most do), you can consolidate your debts into one easily manageable location and also enjoy a break from interest charges. This should allow you to make larger repayments of your debt, since the repayments are not being eaten up by interest charges.
Bear in mind that the total of your transferred balances will normally need to be no greater than 70-80% of the credit limit on your new card, and that American Express credit cards have a maximum transfer amount of $10,000.
Some cards accept personal loan balance transfers
Some credit card providers, including Citi, Coles, Qantas Money and Virgin Money, allow personal loan debt as well as credit card debt to be transferred to a balance transfer credit card. This allows you to make your debt consolidation more complete.
Watch out for the balance transfer fee
Some balance transfer offers come with a fee attached, a fee payable upfront as a credit establishment or processing fee. If a fee is charged, it is typically 1% or 2% of the amount being transferred. So if you’re transferring a balance of, say, $10,000, and the balance transfer fee is 1%, you’ll pay a $100 fee.
Minimum monthly repayments are necessary
During the balance transfer’s interest-free period you will be required to make at least the minimum repayment (typically the greater of either 2% or 2.5% of the account balance, or $5) once per month. But it’s a good idea to pay off as much of the debt as you can each month, otherwise you’ll be hit with high interest charges once the interest-free period expires.
Interest-free days on purchases forfeited
Credit cards typically come with up to 44 or 55 interest-free days on purchases each month, but this only applies if the account does not have a carried-over balance from the previous month. If you have an unpaid balance transfer on your account, you will be carrying a balance on your account and with the vast majority of cards you will forfeit your interest-free days on purchases. Interest will be charged on any purchase transaction you make, from the date of the transaction until the date it is repaid. So you may want to avoid using your card for purchases until you have paid off your balance transfer.
However, if the balance transfer credit card also has a combined offer of 0% on purchases for an introductory period, you can still use your card for interest-free purchases for as long as the 0% on purchases offer lasts.
Beware the revert interest rate
It’s a good idea to use the interest-free period on your balance transfer to pay off as much of your debt as you possibly can. That’s because you’ll start paying interest on any remaining balance, at the revert interest rate, as soon as the offer period expires. The revert interest rate will be either the card’s ongoing purchases interest rate or the even higher cash advance interest rate.
Alternatives to a balance transfer credit card
If you want to use a balance transfer to get out of debt, then there is another option worth considering: a debt consolidation loan. There are several key difference between balance transfer cards and a debt consolidation loans:
- Interest rates: Credit card balance transfers tend to be at 0% interest whereas debt consolidation loans usually charge somewhere in the region of 5 - 12%, which is significantly higher.
- Term: When you balance transfer to a new credit card, you get the introductory interest rate for a specified length of time. Once that period ends, whatever is left of the amount initially transferred will revert to a different rate (typically either the rate applied to purchases or cash advances). The problem is that you could make the minimum repayment throughout the entire introductory period — and use the card for new spending — meaning you don't actually use it to get out of debt. Debt consolidation loans have a fixed term, which means you know with certainty when the loan will be paid back. Assuming you don't take on new debt in the interim, once that loan has been repaid, you would be debt-free. Debt consolidation loans can be repaid over a longer period of time than the introductory rate on credit card balance transfers, which tends to be in the range of 12 - 24 months.
- Fees: Transferring your credit card debt to a new card typically, but not always, incurs what's known as a balance transfer fee. This is a one-off charge that is typically in the region of 1 - 3%. In addition, many credit cards charge an annual fee. Debt consolidation loans usually only have an application fee. However, the application fee can vary based on your credit worthiness.