A credit card balance transfer is a form of transferring your existing credit card debt to a new credit card with a lower interest rate for a certain period of time. The aim is to completely pay off your credit card debt during that low interest rate period.
However, if you don’t pay off the debt before the end of the promotional period, you will get charged a higher interest rate. The revert rate on balance transfers – the interest rate that your new credit card reverts to once the introductory rate is finished – can be shockingly high.
The pros and cons of balance transfers
As shown in the above table, there are many benefits and limitations to a balance transfer. Before you consider credit card balance transfer offers, make sure you do your homework and explore other options for debt consolidation.
The pros of balance transfers
Take advantage of a lower credit card interest rate
Transferring your existing balance to a lower interest rate card will have a much bigger impact on your credit card debt, and you may even be able to pay it off entirely.
Move your balance to a credit card with better terms
If your current card’s annual fee is too high, or you feel that the rewards on offer aren’t worth it, swap to a card that offers a better deal.
Consolidate your credit card debt
Move the balances from multiple separate cards onto a single one. It’s easier to pay off your debts when they’re all in one place.
A low-interest time frame to repay your credit card debt
Balance transfer cards can be used for paying off existing debts, by taking advantage of the set time frame where very low or no interest is charged on the debt. You can cut up the physical card as soon as you get it, since you shouldn’t be using it to buy anything.
The cons of balances transfers
You can end up with a much higher interest rate
Once the promotional rate expires, the interest rate on the card will instantly skyrocket to the revert rate, and this is often much higher than with regular credit cards. This is how banks make their money with a credit card balance transfer. Make sure you don’t throw away money by missing a deadline!
You might get caught out by a credit card balance transfer fee
A lot of balance transfer credit cards charge a balance transfer fee, as well as the usual annual fee. The transfer fee is usually between 1% and 3%. Before you transfer your balance, you should factor in the cost of moving your balance. It might actually cost you less to just leave it on your old card.
Balance transfers can hurt your credit score
Your credit rating takes a hit whenever you open up a new card with a balance that is over 30% of the card’s limit. Your credit score can drop if the new card you choose doesn’t have enough available credit, but timely repayments should alleviate this penalty fairly quickly.
You’re opening yourself up to more debt
Suddenly having more credit available can be too tempting for some. So, you’ll need to exercise a good deal of restraint if you want to avoid facing even further debt.
When should you consider getting a balance transfer?
A credit card balance transfer could work for you if:
- You have a credit card debt on which you are currently paying interest.
- You can find a 0% p.a. interest rate for longer than 12 months.
- The annual fee is not too high.
- You know that you can afford to repay the entire debt within the 0% promotional period.
If you do decide to go ahead with one of the credit card balance transfers available, then you need to cancel your old card and exercise willpower to not make any new purchases on the balance transfer card. If you cannot repay the debt within the promotional period, you will need to switch to another balance transfer or low rate credit card to finish repaying it, to avoid the revert rate.
However, simply shifting your money to another card – even on a lower interest rate – is a short-term interest rate relief option, not a solution to overspending habits. A balance transfer is a bad idea if you transfer your balance to a new card and then run up a debt on your original card as well!
Do I need a balance transfer?
We can’t answer that question for you but, to help work out if it’s right for you, ask yourself the following questions:
- How large is my balance?
- How much can I afford to repay each month?
- Is there a balance transfer card that can offer me a long period with a 0% interest rate?
- Will I be able to pay off my credit card debt before the end of the promotional period?
- Am I likely to stick to my budget for repaying the debt?
- Are the fees reasonable?
- Will I be able to limit the use of the balance transfer credit card and not acquire extra debt?
- What are my intentions for using the card once I’ve paid off the debt? Keep it or close it?
You should consider how transferring the balance of your credit card debt will affect your finances in the long term. Ultimately, if you save money and pay off your credit card balance faster, then transferring the balance should be worth it. However, always make sure you read the product disclosure statement (PDS) and terms and conditions before making a final decision.