A balance transfer allows credit card holders to transfer high-interest credit card debt to another card with lower interest rates. Instead of making repayments towards interest charges, applicants repay a portion of the debt principal each month, allowing them to clear debts faster. The interest rate on the new card could be as low as 0% for 6-9 months, depending on the bank's promotional offer.
Debt consolidation option
A 0% or low-interest balance transfer is a good option for debt consolidation. Depending on your new card's credit limit, you may be able to transfer more than one credit card or store card balance, a personal loan balance and even a hire purchase balance. Your old, high-interest debts are paid off, leaving you with a single balance to repay while taking advantage of the 0% or low interest rate.
Balance transfer fees
Some credit cards charge balance transfer fees, which usually range from 1% to 3% of the total transfer amount. While there are usually plenty of offers around with no balance transfer fee, it may sometimes be worth paying a small fee to secure a lower interest rate or a longer low-interest term.
Rates and offers
Various credit card balance transfer options can satisfy immediate and long-term needs. You'll need to consider the following standard features:
- 0% introductory interest rate. Some cards offer a balance transfer a starting interest rate of 0% for six or nine months.
- Low introductory interest rate. If you need longer to pay off your debt, consider a low-interest balance transfer offer, typically between around 2% p.a. to 6% p.a. for 12 to 24 months.
- 'Life of the balance' low rate. This kind of balance transfer offer guarantees an ongoing low interest rate (e.g. 5.95% p.a.) on the transferred balance, until you have fully repaid it.
- Revert rate. If you fail to settle all your debts within the introductory period (except for 'life of the balance offers), your interest rate will revert to a higher APR, generally the card's standard interest rate on purchases, but sometimes the even higher rate applied to cash advances.
- Annual fee. Annual fees can range from $0, to as high as $390 for a premium card with a balance transfer offer.
- Other fees. Other than the balance transfer itself, additional costs to consider are those you might incur by making late or returned payments or overseas transactions.
How to apply for and use a balance transfer
Applicants can transfer balances from one or more credit cards into a single balance transfer card. To successfully perform a balance transfer, consider the following steps:
- Review your current credit card balance. To determine whether or not you need a balance transfer, first evaluate your financial situation. You can review your outstanding balance and billing statements through online banking, mobile apps or eStatements. Note important information, such as your current annual percentage rate (APR) and debts that you need to resolve immediately.
- Select a balance transfer credit card. There are dozens of balance transfer credit cards offering various perks and benefits. Many will provide an interest-free or low-interest grace period on the transferred balance of anywhere between 6 to 12 months. Others might charge a transfer fee. Compare a variety of credit cards by weighing interest rates (including the ongoing interest rate on purchases), average monthly payments and annual fees. Some cards may waive the annual fee in the first year, or offer Airpoints or rewards points, or perks like free travel insurance and airport lounge access. Choose the card with the best combination – for your situation – of short-term debt clearance and long-term benefits.
- Apply for the card and request a balance transfer. Make your card application (online is the easiest way, and you can do it here at Finty) and ideally request your balance transfer during the application process. You'll need to provide details of the balance(s) you want to transfer, including the credit card or loan account numbers. It may take a few days or several weeks for issuers to process your balance transfer. The bank issuing your new card will pay off your old balances, but will not close the accounts for you. You need to do that yourself.
- Pay down your debt. Aim to pay off your debts within the introductory period to save as much as possible and avoid the revert interest rate. This means repaying as much of the balance as you can each month, rather than making just the minimum repayments (unless you already have enough cash in a savings account to repay the balance at the end of the promotional period).
- Don't use your balance transfer credit card for new purchases until the balance is paid off. In most cases you won't qualify for the normal interest-free days on purchases while you have an unpaid balance transfer on your account. So use cash, or another card, until the balance is fully repaid and your interest-free days on purchases are restored.
Types of balance you can transfer
You can't perform a balance transfer within the same bank or credit card company. You can, however, transfer car loans, personal loans, student loans and hire purchase balances, as well as more than one credit card or store card balance, usually to an amount not exceeding 90-95% of the credit limit on your new card.
Your credit score will also dictate how much money you can transfer, since it will have a big influence on the new credit limit you are given. The better your payment history with previous lenders, the higher your chances of being able to transfer a large amount.
Balance transfer alternatives
A balance transfer credit card isn't the only solution to eliminating your debt. You can also consider the following alternatives:
- Debt consolidation loan. A debt consolidation loan transfers multiple existing loans to a different lender. These loan products may have attractive repayment terms such as a lower interest rate and lower monthly payments. However, closing old accounts can reduce your credit score by reducing your credit mix.
- Home loan refinance. If you have substantial equity in your home (that is, its market value is higher than the amount you owe on your home loan) you can release some of that equity as cash by refinancing your home for a larger amount and possibly a lower interest rate or longer term. You could then use the surplus cash to pay off high-interest debt like credit cards. But be aware that you are converting short-term debt into long-term debt.