What are the pros and cons of credit card balance transfers?

Whether you’re struggling with your credit card repayments or whether you’d just like to reduce them so you can divert the saved funds somewhere else, a balance transfer might be your ideal solution.

You may be asking yourself what is a balance transfer going to do for your finances, especially if you’ve never heard of one before. In essence, a balance transfer is when you move your existing credit card debt onto another card. The advantage of making this move is that you’re moving your balance onto a card that has a lower interest rate, or maybe even a zero per cent interest rate, for a period of time.

If you have six, 12, 18, 24 or maybe even 36 months ( three long years) with no or hardly any interest accruing on your debt, you can really work on reducing the principal balance. It sounds great and it works out for most people, but before you dive into a comparison site to look for the best balance transfer credit cards, stop and think about the pros and cons.

The advantages of making a balance transfer

By far the biggest advantage of a credit card balance transfer is the period of low or no interest. If you have a fairly high interest rate on your current card and you’re looking to free yourself up, then moving to a card on which every dollar of your repayment attacks the principal is a real boon.

How much can a balance transfer credit card save me?

Think about it, if you have a card with a $4,000 balance on it, an interest rate of 17.99 per cent (the average rate for most providers) then by paying $200 a month, you’ll take 24 months to pay it off. You’ll also pay $791 in interest.

By doing an interest free balance transfer, you can pay your $200 a month and be free in just 20 months. Alternatively, you could reduce your monthly repayments to $167 a month and you’ll have cleared it in 24 months. Do the maths yourself on your own card and debt here.

Move on from bad terms to your happy place

If your current card has a fee structure that you don’t like, or a less–than–generous rewards program, a balance transfer could take you to a better place. It may be that the new card has a longer interest–free period on new purchases, so once you’ve cleared your older debts you can start to make use of this new grace period.

You can consolidate several cards and debts

If you have a few cards or personal loans with differing rates of interest on them, as well as different payment dates, then you can simplify your life by moving them all onto one new card. Hopefully there’ll be no interest for a while, although you need to make sure that the card that you’re applying for has a high enough credit limit to accommodate your various balances.

The downsides of doing a balance transfer

There’s no such thing as a perfect financial solution, even with no interest! Banks and credit card companies are in business to make a profit, so yes there are downsides. Make sure you understand these traps:

Watch out for the revert rate

At the end of the interest-free introductory period your balance transfer credit card will start charging you interest on your debt. And the revert rate could be quite high.

So really look at the revert rate— if it’s higher than your current rate, you want to have paid off your debt before it begins.

You may have to pay a balance transfer fee

Nothing comes for free and many credit cards charge a balance transfer fee of around two or three per cent.

Then there may be ongoing fees on your new card. Factor these in when you’re comparing deals, as you might find that it’s cheaper to stay on your old card and try to pay a few dollars extra each month.

Balance transfers can damage your credit score

Whenever you apply for any new credit product, and whenever you open a new credit card account, your rating can take a dip because it can look as if you’re in financial stress.

If you’re consolidating several balances onto one card, it can also mean that you’re using more than 30 per cent of your credit limit. This is also a sign of being too reliant on credit. If your transfer will make you do this, consider keeping your old account open as the limit on this card can improve your ratio. Just don’t use it!

You have to accept that you’ll lose credit score points, but you can easily recoup them by making sure that you make your repayments on time.

You could end up in more debt

If your balance transfer means your old card is suddenly freed up, then you may be tempted to spend on it. You must cut this card up, or just leave it alone. Keep it open only if it increases your credit limit—or you can end up with two credit card debts.

To make your final decision

You need to look at how this move will affect your finances in the long run. If you know you’ll be able to pay down your card faster and not rack up new debt on your old card, then you should go for a balance transfer. If you’re not sure, then try to pay a little more off your current card each month to reduce the amount of interest generated.

Compare credit card balance transfer deals and offers from Australia’s major banks, credit unions and other credit card issuers here.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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