Balance transfers are by no means free. A credit card with a 0% balance transfer deal might seem like a great offer, but there are costs you need to be aware of.
A credit card balance transfer means transferring your credit card debt to a new credit card with a lower interest rate so that you can afford to pay it off.
Balance transfers can be a good way of paying off debt if you choose a low-interest rate with enough time to pay it, but many people may not know about some of their pitfalls – hidden or otherwise.
Keep reading to discover what balance transfers cost.
What do balance transfers cost?
Balance transfer costs you need to be aware of include:
|1||The balance transfer fee||Some cards charge a fee of up to 3% of the balance being transferred|
|2||An annual card fee||Some cards charge a fee of multiple hundreds of dollars.|
|3||The purchase interest rate||Any new purchases made using a balance transfer card will be charged the purchase interest rate.|
|4||The revert rate||If you don’t pay the debt before the promotional period ends, you could pay an interest rate of 20% and upwards.|
We discuss each of these in more detail below.
1. Balance transfer fee
While 1% to 3% might not seem like a lot, it can add up to quite a lot if you are transferring a large credit card debt. Since this number could potentially be bigger than the amount you’d stand to save in interest by switching to a balance transfer credit card, in some cases it would be a better idea to just stay with your existing account.
How much you can expect to be charged from a balance transfer fee can usually be found in the relevant product disclosure statement (PDS). Make sure you consult the PDS before settling on any particular balance transfer card.
2. Annual card fee
Some, but not all balance transfers, come with a yearly fee.
A no annual fee card, as the name suggests, is a card that doesn’t charge a regular yearly fee. A card that does that also has a low or $0/year annual fee – as well as a 0% promotional interest rate on balance transfers – can represent great value for consolidating and repaying credit card debt.
3. Purchase interest rate
While the initial debt that you transfer over to the new credit card might not attract any interest initially, any extra purchases you make on that card could attract interest from the day of the purchase. The purchase interest rate can be expensive! Check them out here on Canstar’s website.
So in many cases, it can be more expensive to buy things on a balance transfer credit card than it would be with a regular credit card. But since the main purpose of a balance transfer is to eliminate debt, you shouldn’t be buying anything with it anyway!
4. Credit card revert rate
The revert rate is what gets a lot of people. Say for example you take out a balance transfer with a 0% interest rate for 12 months. Your financial institution is banking (pun intended) on you not being able to pay your balance off in that time.
The instant your unpaid debts reach the end of the 0% interest period, the revert rate kicks in.
The credit card revert rate is the ongoing interest rate the bank charges you at the end of the promotional period. While this rate is different for each card, it is typically higher than the rate of standard credit cards. In fact, even with some non-rewards credit cards, you can go from a 0% interest rate to a 24.99% interest rate:
Make sure you pay off your balances well in advance of the promotional period ending! If you don’t think you can pay down the entire balance by the end of the promotional period, then either don’t get a balance transfer card or get one with a longer promotional period, because you don’t want to pay that revert rate.
Other things to be aware of:
Even though you may not be charged any interest on your initial credit card debt when you use a credit card balance transfer deal, there are other potential traps to be aware of.
In addition to the hidden costs, here are some other facts about balance transfers that many people may not know:
Balance transfers are not instantaneous
Transferring your balances from old cards to the new balance transfer card doesn’t happen overnight; it usually takes about 2 – 4 weeks. You will need to keep your old card active during this process, or you’ll risk incurring extra fees and interest.
Balance transfers are limited
The majority of balance transfer cards have a transfer limit. That is, you can only transfer money from one card that is no more than a certain percentage of the limit, such as $900 onto a $1,000 card if the maximum balance transfer is 90%. You will need to check what this amount is with your bank.
While a credit card balance transfer deal may be a good move to help you tackle and pay off a pesky credit card debt, carefully checking the terms and conditions first before choosing the right card for your situation.
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