Credit balance transfers – should you stay or should you go?

Written and accurate as at: 10 August 2015

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:

  • Once you’ve transferred the balance to a new credit card, make sure you cancel the old credit card if this was the original intention. This will remove the temptation to spend on both cards and accrue more debt.
  • If you decide to go with a new credit provider, they are likely to offer you a higher credit limit. Typically they may offer to transfer a balance which is around 70% of the limit of your card, so if you have $7,000 owing, your new card may have a limit of around $10,000. If you have enough willpower to ignore the extra limit, then it should be fine. If you think it would be too tempting, you could ask the credit card provider to reduce the limit. However make sure you can survive if you have a financial rainy day.
  • Remember that interest will typically be payable on all new purchases on your credit card, even during the initial interest-free period. The interest-free offer will generally only apply to the amount you have transferred from another provider.
  • Make sure you check what the standard interest rate will be after the initial interest free period finishes. In some instances, the standard interest rate can be a lot higher than your existing card, or other cards on offer. It pays to do your homework to check this out as well as any other administration or annual costs that may apply.
  • Once you’ve repaid your credit card you may want to consider reducing your limit to a suitable amount which just covers an emergency or contingency or for use as a transactional tool, if you can pay it off in full each month.

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.