With over-indebtedness growing among Australian households, many people wonder how they’ll ever be free of their monthly debt repayments, or at least reduce them to a manageable level. Almost 20 per cent of Aussies feel overwhelmed by their credit card debt in particular, so if you’re among this number, you might want to think about doing a balance transfer. What does a credit card balance transfer involve? When you make a balance transfer, you’re moving your credit card debt onto a new card. The aim of this is to move the balance to a card that has a lower interest rate than your current one, and ideally a zero interest rate. This low or no interest rate is usually introductory, but could be as long as 24 months. Having a period of zero or low interest reduces your monthly repayments to a more manageable level and you can pay much more off the principal balance. You should try to clear the balance during your introductory period so that when it ends, you’re not paying anything at all. At the very least, your payments stay small. Balance transfers are great if you’re confident that you can pay off, or at least pay down, your outstanding balance within the introductory period. What can happen, though, is that some people can get into the habit of transferring their balance repeatedly while not actually making any progress on the principal. This sequence of events can damage your credit rating. More about your credit rating Your credit rating is a measure of risk that lenders use to assess how likely you are to pay back the money they lend you with no problems. The better your credit rating is the more money lenders will extend to you; they’re also more likely to offer you lower interest rates on the amounts, as well as other favourable terms. Australia’s credit reporting agencies use a numerical scale and the higher your score is, the better your rating is. Higher scores mean that you’re able, willing and organised enough to service your debts well and on time. Lower ones show that you may have had problems with repaying debts in the past, or that you simply haven’t had much credit at all. What is a balance transfer going to do to your rating? You shouldn’t just rush into a transfer. Make sure you visit a comparison site to look at the balance transfer offers first so you get the best deal you can. You also need to think about what a balance transfer could do to your credit rating, because if you apply to two or more cards in a short period of time, these “inquiries” leave a footprint on your file. It’s important to feel confident about your chances of acceptance before submitting an application, as rejections leave an even bigger mark. Even though an interest free credit card transfer is appealing, it may be better to stay put for a while longer if your application is likely to be rejected. Here’s how a balance transfer can affect your rating Remember, applying for that zero balance transfer deal will affect your rating even if it’s accepted. It’s worse if you’re turned down, however, so if this happens, do not apply to another card. It’s best to wait a few months before trying again. You could have difficulty making the repayments. If you can’t pay off (or down) the balance before the promotional period ends, you may end up on a higher interest rate than before. This increases your level of debt and your difficulty, which will hurt your credit score. If your old account is still open after you’ve transferred your balance this can also harm your credit rating, especially if you don’t pay off any new purchases on the older card. Make sure you pay as much as you can off and try to avoid making too many purchases on the older card. If you have to make a second balance transfer after your first one ends because you didn’t manage to clear it, this doesn’t look good on your files. How to improve your credit rating Space out your applications for balance transfer cards—try to limit them to once every six months at the most. If your applications are widely spaced out then they don’t have the same impact. Look over the terms and conditions of your new card very carefully, even before you apply. You need to make sure that you fit all of the eligibility criteria—minimum annual income, credit rating and residency, for example—and that you have all the supporting documents on hand to help your application along. Do your utmost to avoid a late payment because this can bring your promotional interest rate to an abrupt halt. Not only does the late payment leave a dent in your history, but you could suddenly be stuck with a higher interest rate than you were on before. If you can pay off the entire balance by the end of the period, you’ll be demonstrating to the credit reporting agencies that you can be disciplined and that you’re more than willing to pay your debts. Try to avoid making any new purchases during the promotional interest period because you could be increasing your debt load. Your repayments will be used to pay whichever portion of the debt attracts the higher interest rate and this will almost certainly be the latest purchase rather than the transferred balance. This is a big waste of money when it could be used to eliminate that troublesome old balance. Balance transfers can be very useful indeed In some circumstances, a balance transfer is a really good solution, as long as you’re planning to pay off a finite amount of debt. You should also look at no-fee credit cards too, so that your annual spend on the account is lowered and more manageable. Just make sure that you do your homework and don’t rush to apply for the first card that catches your eye. You can 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.