Balance Transfer Credit Cards

What is a balance transfer credit card?

A balance transfer is the process of transferring existing credit card debts from one card to another, usually with a different provider.

Balance transfer cards come with much lower interest rates, often as low as 0%, for a limited period of time when existing debt is moved to the new credit card account.

This introductory or honeymoon period provides additional time to steer clear of interest charges and can allow you to potentially pay off the debt with less interest and at a faster rate. Any balance remaining after the introductory period would likely revert to the card’s purchase rate.

How long do balance transfers last?

The introductory or honeymoon period with the low interest rate can last for varying amounts of time – some may be as quick as three months, others can last as long as 36 months.

Typically if you have credit card debt, the rationale behind using balance transfer cards is to repay your debt without having an intimidating interest rate looming over your head. If you had a 0% interest balance transfer for 36 months, then that’s three years you’ve got to pay off the principal amount of your debt with zero interest.

How much can I transfer into a balance transfer credit card?

Credit card providers will generally allow up to 80% of the new card’s credit limit to be transferred, however it solely depends on the provider.

For example, say a bank offers you a balance transfer credit card that allows you to transfer 70% of your credit limit. If your credit card debt sits at a balance of $4,200, this would mean the bank would need to approve a credit limit of at least $6,000 for one balance transfer.

It’s important to note, if there is still money owing on your current credit card after the transfer, you’ll have to pay interest and fees on that card alongside the new balance transfer card.

How much does a balance transfer credit card cost?

Aside from potential costs such as annual fees, early repayment fees and cash advance fees, one of the most common costs of a balance transfer credit card is balance transfer fees.

A balance transfer fee is a one-time charge that will generally be applied when moving debt to a new card. Credit card providers will generally charge between 1-3% of the balance transfer amount as the balance transfer fee.

Say the balance transfer fee on a specific card was set at 1.85%. On a balance of $4,200, this fee would add $77.70 to the total balance.

Aside from balance transfer fees, balance transfer cards, like any credit card, will charge interest on purchases made using the card. Some cards will offer a 0% purchase rate, meaning you won’t have to pay interest on new purchases, however this expense can be anywhere up to 22% p.a.

This means that a balance transfer offer likely only relates to the existing debt you have transferred – not for accruing new debt.

It’s important to also factor in the costs of interest to the balance transfer credit card, should you potentially exceed the introductory or honeymoon period of 0% or low interest. This has the potential to be a hefty expense down the track if you are not careful and plan accordingly.

How much you could save with a balance transfer

A balance transfer can be a good opportunity to get rid of intimidating debt and interest hanging over your head. By taking advantage of a balance transfer offer, you could save thousands of dollars and shave-off many years it would otherwise take to pay off your debt.

If you had a $10,000 debt and only made the minimum repayments on a credit card with an 18% p.a. interest rate, it would take nearly 44 years to pay off, and ultimately that $10,000 would cost you more than $36,000.

If you transferred that debt to an eligible card with 0% interest over 36 months, you could pay off the principal in monthly installments of about $278, plus the likely transfer fee of $100 to $300. With a debt of $10,000, you would likely need a credit limit of $12,500.

How to compare balance transfer credit cards

With multiple card options available, alongside working out the best option for your individual financial position, finding the right balance transfer card can be a daunting task. To simplify this, there are a number of important features to consider. These include:

• Length of introductory offer: Many 0% balance transfer cards offer promotional periods of up to 36 months. Ensure you select a card that will offer enough time to pay off your balance before having to revert to the standard interest rate.
• Balance transfer fee: Not all banks charge a balance transfer fee, but those that do typically charge a rate ranging from 1% to 3% of the total balance transfer amount. This fee is charged when your debt is transferred to the new card.
• Balance transfer revert rate: Once your promotional period ends your interest rate will revert to the current interest rate. This is usually the standard cash advance or purchase rate.
• Eligible debts you can transfer: You can usually transfer debt for a number of different credit cards and even from some personal loans.
• Annual fee: There will usually be an annual fee on a balance transfer card. Some cards will have a $0 annual fee or may even waive this cost for the first year. However, when this fee is charged, it is treated as a purchase and attracts the same interest rate as other purchases made with the card. Paying the annual fee immediately will mean you avoid interest charges.