Balance transfer credit cards: pros and cons

Co-Author: Michelle Norton

Balance transfers can be very appealing when you aren’t making any headway paying off debt at your current credit card interest rate. Just make sure you read the fine print before you commit to an offer...

Advertised balance transfers can look very attractive if you’re stuck in the debt cycle – especially if you’re on a high interest rate credit card. As at December 2016, the maximum credit card interest rate is 25.99%, the average is 19.24% and the minimum is at 12.69%. This means there is a whopping 13.3% difference between the highest and lowest rates.

It’s unsurprising, then, that customers start the hunt for a lower rate – and will switch provider to get it. Banks also use low balance transfer rates to encourage customers to switch cards and hopefully stay with them forever.

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Let’s check out what credit card balance transfers are all about – and what you need to know before you make the switch.

What is a balance transfer credit card and how does it work?

A balance transfer is when you transfer part or all of an account balance into another account, which is generally held at another institution. In the case of credit cards, you would transfer the credit card balance onto another credit card. A balance transfer means you can move your debt to a zero or low interest credit card for a promotional period. If you’re suffering from a Christmas shopping debt hangover, this can all sound pretty appealing. But, beware, there are a number of traps with balance transfer offers to watch out for. In fact, the Banking Ombudsman Scheme – which deals with disputes between customers and lenders – often receives complaints from people who do not understand how credit card balance transfers work.

 

“Transferred balances may have special low-interest rates, but new purchases and cash advances are usually subject to the bank’s normal rates. Check the card’s terms and conditions to see how interest rates apply.

“Deals on debt balance transfer interest rates may also only be for a set time. Make sure you know when the low-interest rate period ends and what the subsequent interest rate will be.”

– Banking Ombudsman

Balance transfer offers: the traps

Here are some tips on what to consider with credit card balance transfers

Tip 1:

Outstanding balance with interest rate on new balance transfer cards

After the advertised number of months for balance transfer offers – ranging from six months to life of the balance – all unpaid balances are transferred to the standard credit card interest rate. In the case of balance transfers on credit cards, the rate you go on to after the offer ends is known as the “revert rate”.

According to CANSTAR’s database as at 19 December 2016, there are four credit cards with balance transfer offers of 0%, all for a 12-month period. But it’s important to keep in mind that the average revert rate for these 0% balance transfer cards is 18.58%; the lowest revert rate for the 0% balance transfer cards is 13.45%. To put things into perspective, CANSTAR’s latest credit card ratings research shows the lowest interest rate for a standard credit card in 2016 is 12.69% – 0.76% higher than even the lowest possible revert rate on a 0% balance transfer card. So, while a 0% initial interest rate seem very enticing, don’t forget to check rates in the long term! As a general rule of thumb, consumers should find out the promotional rate, when the promotion expires, and the rate they will pay after the expiration.

Trap 2:
Expired

With a balance transfer credit card, most lenders first apply payments to the outstanding balance that has been transferred, rather than the new spending, which attract a higher interest rate. Clever consumers can find a way around this and still take advantage of balance transfer offers. Refraining from spending any money on the new credit card, while you slowly pay off the balance, allows you to take advantage of the low balance transfer credit card rate. Only after the pre-existing credit card balance is paid off in full should you put purchases on the new card.

Trap 3:

Loyalty points and interest free days on balance transferWhen taking on a balance transfer credit card, there are no loyalty points or interest-free days on the balance transferred. Interest is charged from day one with balance transfers.

 

Trap 4:

Read fine print for making more than one balance transfers

It pays to read the fine print before signing up to anything, particularly if you want to avoid traps with bank products such as a balance transfer credit card. When transferring from more than one card to one new credit card, there may be different introductory rates. The fine print in some cards say that where you’ve made more than one balance transfer, payments may be allocated to the balance transfer with the lowest interest rate first.

Balance transfer offers: cards for paying off $2000, $5000 and $10,000 balance over 2 years

Again, it’s important to keep in mind the differences in rates and fees between balance transfer credit cards. For example, ANZ’s Visa/ MasterCard has a low introductory rate of 1.99% over a 12-month period, but then reverts to 20.95% and has an annual fee of $30. With a monthly payment of $91.93 on this balance transfer card, you’ll have repaid $2,206.32 after two years.

On the other hand, The Co-operative Bank’s Fair Rate card has a higher introductory rate of 4.95%, but it reverts to a rate of 12.95% after 12 months. The annual fee is also $10 less than the first credit card example. On this card, with a monthly required payment amount of $91.26 on a transfer balance of $2000, you’ll have repaid $2,190.24. In the end that’s a $16.08 difference.

CANSTAR has crunched the numbers on balance transfer options for paying off a balance transfer of $2000, $5000, or $10,000.

Top Cards for paying off $2,000 balance transfer over 2 years
Company Card Rate Fee Period Revert Rate Annual Fee Annual Fee First Year Monthly Payment Required Total Repaid
The Co-operative Bank Fair Rate 4.95% 12 months 12.95% $20 $20 $91.26 $2,190.24
Westpac NZ Low Rate MasterCard 5.95% Life 13.45% $65 $0 $91.31 $2,191.44
ANZ Bank NZ Visa/MasterCard 1.99% 12 months 20.95% $30 $30 $91.93 $2,206.32
Kiwibank NZ MasterCard Zero 1.99% 6 months 16.90% $0 $0 $92.55 $2,221.20
ASB Bank NZ Visa Light 8.95% 6 months 13.50% $0 $0 $93.67 $2,248.08

 

Top Cards for paying off $5,000 balance transfer over 2 years
Company Card Rate Fee Period Revert Rate Annual Fee Annual Fee First Year Monthly Payment Required Total Repaid
Westpac NZ Low Rate MasterCard 5.95% Life 13.45% $65 $0 $224.21 $5,381.04
ANZ Bank NZ Low Rate MasterCard 1.99% 12 months 13.90% $58 $58 $224.38 $5,385.12
The Co-operative Bank Fair Rate 4.95% 12 months 12.95% $20 $20 $225.53 $5,412.72
Kiwibank NZ MasterCard Zero 1.99% 6 months 16.90% $0 $0 $231.37 $5,552.88
ASB Bank NZ Visa Light 8.95% 6 months 13.50% $0 $0 $234.18 $5,620.32

 

 

Top Cards for paying off $10,000 balance transfer over 2 years
Company Card Rate Fee Period Revert Rate Annual Fee Annual Fee First Year Monthly Payment Required Total Repaid
ANZ Bank NZ Low Rate MasterCard 1.99% 12 months 13.90% $58 $58 $443.73 $10,649.52
Westpac NZ Low Rate MasterCard 5.95% Life 13.45% $65 $0 $445.70 $10,696.80
The Co-operative Bank Fair Rate 4.95% 12 months 12.95% $20 $20 $449.31 $10,783.44
Kiwibank NZ Low Rate MasterCard 1.99% 6 months 13.45% $50 $50 $458.44 $11,002.56
ASB Bank NZ Visa Light 8.95% 6 months 13.50% $0 $0 $468.35 $11,240.40


Balance transfer credit card calculators available

Several of the banks have useful balance transfer calculators on their websites, such as WestpacBNZANZ and ASB. Even better, is a balance transfer calculator that includes the introductory interest rate and term, the normal credit card rate, the annual fee and any balance transfer fee that may be applicable.

When it comes down to it, the best way to knock off credit card debt is far from a one-size-fits-all solution. Doing your homework on rates, terms and fees is the best first step in avoiding a balance transfer offer stinging you in the long run.

CANSTAR is an information provider and in giving you product information CANSTAR is not making any suggestion or recommendation about a particular credit product. If you decided to apply for a credit card you will deal directly with a financial institution, and not with CANSTAR. Rates and product information should be confirmed with the relevant financial institution. For more information, read our terms of use, important notes, and additional information.

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