A credit card balance transfer offers the option to transfer the whole or part of your debt from one credit card provider to another. The new credit card provider pays the amount you request onto your credit card with the balance outstanding.
Typically the card you are transferring to will have a 0% or a low interest period on the balance transfer for a set time but after this initial period, also known as a honeymoon period, the interest generally reverts to standard interest rates (which can be high). The honeymoon interest rates can often be coupled with applying for a new credit card.
With the typically six or twelve month interest-free periods on offer, ideally if you are transferring a balance to another card this provides an opportune time for you to focus on repaying the amount owing.
Some people have the capacity to repay the balance outstanding in one go, however they might want to have a debt at 0% interest for say 12 months, and have this cash reducing their mortgage or have the cash sitting in their mortgage offset account.
But not everyone has the discipline or a realistic budget in place to be able to pay down the balance within this interest free period.
If you have a hard time restricting your spending on credit, here are some of our tips for managing a balance transfer:
One area to be very careful of when making purchases and repayments on a card that you have used for balance transfers, is which portion of the outstanding balance the repayments get applied to. For example, any new purchases will have the normal (high) credit card interest rate apply. When you make a repayment, it could be allocated towards reducing the balance that was transferred (low/no interest rate) first. This results in you accumulating debt at high interest rates whilst your repayments are paying off low/no interest debt. So it pays to read the fine print.
A balance transfer is just one option available to help you manage your debt. Some other options may include making more frequent repayments and refinancing high-interest rate debt to a lower interest rate personal or home equity loan. It pays to speak to your lender or your financial adviser to understand your options as there are many strategies that can assist you to get on top of debt and start saving.