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How to get in front of credit card debt with a credit card balance transfer.
Credit card debt is no one’s idea of a good time, yet for hundreds of thousands of Australians paying credit card debt is as much a part of everyday life as a trip to the dentist. Credit card balance transfer are increasingly becoming a popular way for people with growing credit card debts to manage their finances. But are they really a magic bullet? We’re going to look at the ins and outs of credit balance transfers, so you can find the best way to manage credit card debt and get your finances back in the black.
What is a credit card balance transfer?
A credit card balance transfer involves you transferring your credit card debt from one or many credit cards to another credit card which has a lower interest rate. In doing so, you decrease the size of your repayments and make the task of meeting them theoretically simpler. If you research your options, plan well and keep to a strict budget, a credit card balance transfer can be a great way to get rid of credit card debt for good.
How does a credit card balance transfer work?
Many credit cards have introductory low interest balance transfer offers to attract new customers. After a period, sometimes referred to as the promotional or honeymoon period, the credit card will revert to a higher rate. This is typically the cash advance rate, but may be the standard rate if cash advances are not offered, such as with American Express. Balance transfer periods can last anywhere between 5 and 36 months depending on the card, but periods of 12-18 months are the most common.Successful credit card balance transfers see customers consolidate existing credit card debt from their old card (or cards) to a new one. The idea is once the debt is in the new low-interest environment, the old cards are cancelled, and existing remaining repayments can be made at a lower rate. Balance transfer rates can be nothing or up to 7%, and some even include a one-off establishment fee that is a percentage of the total amount you are transferring.
You can see all our cards with a 0% Balance Transfer Rate and no Balance Transfer Fees here, but please note that many of these still include standard Annual Fees. For people struggling with credit card debt, a credit card balance transfer offer can be a great way to get your nose in front of incoming expenses and get rid of household debt.
Recommended cards for a balance transfer
The Qantas American Express Discovery is a great all-rounder card that allows balance transfers. While it does have an upfront balance transfer fee of 1%, it has no annual fee, and offers a 0% balance transfer rate for the first 12 months. With this card you also have the opportunity to collect Qantas Frequent Flyer points for ongoing purchases at a rate of 0.75 points-per-dollar for regular purchases.
If you're looking for a bit more time to pay off your balance transfer, the St. George Vertigo offers a longer 16-month balance transfer period with a 0% transfer fee and a 0% balance transfer rate. Compared to the Qantas Amex Discovery above, it does have an annual fee of $55 and doesn't come with any rewards points program, but it does have a much lower ongoing purchase rate of 13.99% against Qantas' 20.74%.
What are the risks of a credit card balance transfer?
The main risks with credit card balance transfers come when people see it as a magic pill to fix debt in one fell swoop. But credit card balance transfers don’t really work that way. Credit card balance transfers might decrease the size of your debt slightly, but your debt will still be there. For a credit card balance transfer to work, customers must be strict with their finances and ideally make sure the amount owning is paid during the promotional period. Once the promotional period has expired the new credit card will attract a standard interest rate, and any existing debt will have to be repaid at this higher rate.
Tips to a successful credit card balance transfer:
- Cancel your old card – The key to a credit card balance transfer is simplicity. Cancel your old credit card (or cards) and have all your debt in one place so you can pay it off methodically.
- Pay it off before the end of the promotional period – Pay off your credit card debt (or at least as much as you can) before the end of the promotional period. Otherwise you will have to make any remaining repayments at a standard (generally higher) interest rate.
- Pay your credit card debt straight away – That jet-ski might seem like a good idea once the lion’s share of your debt is gone, but if you don’t get back in the black as soon as possible it’s easy to be back to square one. Before you do anything else, pay off all of your debt.