Credit card balance transfers

According to the moneysmart website, as Australians, we have accumulated about $34 billion in credit card debt. Talk about living beyond our means!

Credit cards are excellent tools if used correctly, but unfortunately some people tend to dig themselves into a credit card debt hole that can become very difficult to get out of.

Credit card balance transfers can be offered as a solution to your problem. The basis is that you transfer all of your debt from one credit card provider to another.

The new credit card provider will pay out your debt with your old card and give you a new card, usually with a lower interest rate for a honeymoon period.

Sounds pretty good doesn’t it? It also gives you some breathing room to pay down the debt easier, but is this option for you?

How long have you got?

Often the credit card providers offer a 0% or very low interest rate period on the balance transfer for a specific period of time. It may be 6 months or 12 months interest free which can be an amazing time frame to really knuckle down and pay it off without the interest continually accruing.

Assuming you have the discipline, and you create a realistic budget, you may be able to pay down the balance within the interest free period.

What happens however if you haven’t paid it off after the interest free period?

Make sure you check what the interest rate will change to after the interest free period. This could be a lot higher than the average so it is important to be aware and prepare for this.

How much debt do you need to transfer?

Here is a little bit of info that you may not have known about balance transfers: usually you need to get a credit card with a higher limit than the one that you are proposing to transfer.

Your new credit provider may offer to only transfer 70% of the limit of your new card. So, if you were transferring $4,400 worth of debt, your new card would have a limit of $6,300.

That’s all well and good, but if you have a hard time restricting your spending, then all of a sudden you have an extra $1,900 available to go and spend up big. The credit providers do this because they want you to spend more. The more you spend, the more interest they can charge. If you think you have enough willpower to ignore the extra available on your card, then this shouldn’t be a problem, but remember how you got into this mess in the first place.

It is also common that any purchases you make over and above the transferred amount, will actually be charged at the normal (higher) rate of interest. Beware!

What do you do once it is paid off?

If you have achieved this, then well done! You have a clear credit card and now you need to consider what to do going forward.

For those with spending issues, the first thing I would do is to reduce down the balance on your credit card. Credit cards are useful but having $10,000 available to you to spend freely can be a recipe for disaster. Consider reducing it down to between $2,000 to $3,000 to ensure that you are ok in an emergency, or to use as a transactional tool only.

Ensure you keep 1 credit card only. You will be able to monitor your spending and pay the balance when it is due. Trying to juggle several cards is another sure fire way into a deeper debt hole.

– This post is from our resident senior financial planner, Cara Brett. Check out her details in our about us page.

Posted in: Financial Planning and Cara Brett