Are you struggling to meet your monthly credit card repayments? Constantly running large credit card balances means you are throwing away good money just on interest payments.
According to ASIC, the average debt for each Australian credit cardholder is around $3,800. With typical interest rates in the range of 15% to 20%, the average cardholder is paying around $600 per year in interest. If you are only managing to pay your minimum repayments, your debt will keep mounting, so getting on top of it means you can save thousands in the long-term.
What is a credit card balance transfer?
A popular debt solution is to transfer your balance (or balances) to a new card with a lower annual interest rate. Most financial institutions now offer 0% balance transfers for a limited time. This means that the new institution charges no interest on the transferred balance for a set period of time.
A credit card balance transfer is also a great way to slash your interest payments and climb out of debt faster. However, there are a few potential pitfalls to be aware of.
Take a look at some of the pros and cons of balance transfers:
The Pros Of A Credit Card Balance Transfer
Credit card balance transfers can be a fantastic way to free yourself from debt if you are willing to plan ahead and take a disciplined approach. If you can commit to paying down your debt within the interest-free period, you can save yourself money and improve your credit rating at the same time.
However, it is very important that you read all of the fine print and understand what it means for your particular situation before you proceed.
If used correctly, a balance transfer can certainly save you money. Here are some of the most important pros of doing a credit card balance transfer:
- Interest-free periods. Most lenders now offer interest-free periods of at least 12 months.
- Save on fees when dealing with multiple credit cards. For those holding more than one credit card, consolidating to one card will save on fees and charges as well as interest.
- Lower annual interest rate. A lower annual interest rate on the new card can be advantageous over the long haul.
The Cons Of A Credit Card Balance Transfer
As with many things in life, a credit card balance transfer comes with a set of drawbacks that require your special attention when deciding to go down this route.
Although the balance transfer will offer your lower rates and generally can help you save money, you need to consider some of the other fees that may be imposed throughout the process.
Here are some of the main downsides when using credit card balance transfer to repay your debts faster:
- Details are hidden in the fine print. Speak directly to the financial institution to make sure that the zero rate is, in fact, available to you and clarify what the annual rate is after the introductory period.
- Balance transfer fee. Many of these products carry a balance transfer fee (usually around 2% to 3% of the transferred balance), which offsets the benefits of the lower headline interest rate.
- Annual fee. You need to take the annual fee on the card into account. A high annual fee can outweigh any benefit you would receive from a low or zero percent balance transfer.
- The introductory rate is temporary. If you don’t pay down your debt during that time, you may get slugged with a higher rate when the period ends. In some cases, the rate charged on the balance transfer reverts to the cash advance rate when the initial term is up. The cash advance rate is usually significantly higher than the headline rate, and you could be left worse off.
- A higher rate for new purchases. Some products offer a low rate on the transfer balance, but charge a higher rate for new purchases.
- Don’t forget to cancel your old credit card. You need to remember to cancel your old credit card as soon as the balance is transferred. Having two credit cards can leave you open to temptation.
How To Decide
The bottom line with most of the finance tools comes down to doing your research properly. Credit card balance transfer can be a very useful instrument to pay off your debt faster with a low-interest rate – during the promotional period.
These 4 factors need to be taken into account when deciding to actually go with the credit card transfer:
- You have a credit card debt for which you are paying interest rates.
- You can switch to another credit card with 0% p.a. interest rate for a minimum of 12 months.
- You have checked that the annual fee is lower or close to zero.
- You are ready to repay the debt in the promotional period.
Consider all the advantages and disadvantages of credit card balance transfer, before you decide if the balance transfer is worth it in your case. It is important to keep in mind that this is a short-term aiding tool instead of creating good money spending habits.
If you’re considering debt relief and are unsure what your best move is, Debt Busters can help you put together a strategy that works for you. Fill in the contact form below or call us today on 1300 368 322.