Sunday, 9 October 2011

 

What is Balance Transfer & How Does it Work?

If you would like to apply for a balance transfer credit card, you will need to be aware of a few things. First ask yourself, how long the low interest rate will last? Many banks and credit card lenders offer consumers a 6 or 12 month introductory period after which the interest rate will go up to the standard APR. If you are worried that you will not be able to pay off your debt in that amount of time, you should look for other balance transfer cards offering a longer period of low interest rates.

Other Types of Balance Transfers


Balance Transfers to Specific Banks

You may already have an idea about what bank you’d like to transfer your balance to. So in order to help you speed through the comparison process, we’ve compiled these helpful pages listing offers specific to each bank. Select the bank you’d like to switch to from the following:

Features

  • No balance transfer fee – Unlike in the United Kingdom or United States where balance transfer fees are commonplace, in Australia they are rarely charged. Banks can charge an administrative fee to move a balance from your existing card to your new account, which can, depending on the size of your debt, significantly reduce your overall amount saved. Without a balance transfer fee, you are free to switch accounts as and when it suits you without having to worry about paying the bank for the service.
  • Choice of introductory interest duration – There are many different kinds of balance transfers on offer at any one time. The most beneficial in terms of the amount of money saved are 0% offers, although these are the exception rather than the rule in Australia where there may be only a small handful of 0% cards at any one time. The majority of banks offer new customers a balance transfer deal at a low interest rate, typically in the region of 1-3% for a period of 6-18 months and while you’ll still be paying interest on any outstanding amount owed, it will most likely be much less than what you currently pay. Balance transfer for life offers, where you can transfer a debt to your card at any time at a rate that doesn’t change, are few and far between, even though they represent excellent value for money. However, in light of the fact that banks rarely charge a fee to transfer a balance, these for life offers are somewhat redundant.
  • A window on when you can transfer a debt – You have two choices when switching to a new card. Either you fill in the details of the balance you would like to transfer on the application form, or you wait until the account has been opened and then initiate the process. You’ll typically get the same interest rate regardless, but you should be wary about delaying because most banks insist that you start the balance transfer within a set window of time if you want to get the introductory deal. Failing to do so may mean that you’ll have to pay a higher rate of interest on any debt transferred across to your new account.
  • You have to switch to a different bank to get an introductory deal – Even if you have been with your bank for years, you’ll have to transfer your balance to an account with a different bank in order to take advantage of the introductory offer on interest. Most banks in Australia do not permit their customers to transfer a balance from one account held with them to another.
  • A minimum monthly repayment – Just as it is with any other type of credit card, there is a minimum monthly repayment required that is usually a small percentage of the outstanding debt. However, given the debt-busting potential of a well managed balance transfer, we wanted to make it clear that just paying back the minimum each month is far from ideal. If you’ve switched to a new card to take advantage of the low introductory interest rate, then try to pay back as much as you can afford each month while the interest rate is low. Once the rate reverts to the higher level, switch to another card and keep paying back as much as you can until you pay off your debt in full.

Running the Numbers on What You Could Save

As you will see in the following examples, it really does pay to switch to a 0% card or one offering a long term low rate of interest.
  • Example #1 – Say you currently have a balance of $3,000, which is about average for Australia according to research by the RBA, that is charged an interest rate of 17% per annum. This means that you will be charged approximately 1.42% in interest per month, which works out to be $42.60. If you were to switch to a card with 0% for 6 months, you would save $255.60.
  • Example #2 – You’ve been paying back the minimum monthly repayment for years and continued to use your card for occasional purchases, resulting in a balance of $10,000. You haven’t switched to a lower rate deal, so you’re paying 17% p.a. in interest. This works out to an interest bill of $142 per month. You could switch to one of the long term balance transfer deals offering 2% for the year. This would reduce your interest payments on a $10,000 balance to $17 per month, saving you $125.
For help with working out how long it will take to pay back outstanding debts, check out our debt repayment calculator.

Q&A: What You Should Look For

How do you get the best deal going? Start by asking these questions when comparing offers.
Q: What is a balance transfer? A: Briefly, it’s when one bank pays off the outstanding debt at your old bank and transfers it to your account with them. Typically banks offer promotional deals with low interest rates for a period of time to attract new customers. The promotional balance transfer offer can save a significant amount of money because you’ll be paying much less interest per month. It’s up to you how you use the money you save, but many people use it repay their debt faster.
Q: Why are they a good idea? A: The answer is simple. It’s an easy way to save money. Why pay the standard interest rate on your outstanding debt when you could consolidate it all onto one card with a much lower interest rate? The amount of money you stand to save depends on how large your debt is and how disciplined you are in paying it off, but it could be very significant.
Q: How is my outstanding debt transferred? A: When you apply for a new balance transfer card, it will have a promotional interest rate. When you apply, simply enter the details of the existing account, or accounts, that you would like to transfer. If your application is successful, your new bank will pay off whatever you owe and bring it over to your new account with them.
Q: How long does it take to clear? A: Assuming that your application has been successful, your balance will usually be transferred inside two weeks.
Q: Can the outstanding debt of store cards be transferred? A: Yes, you can transfer what you owe on your store card (e.g. your David Jones credit card).
Q: What is the interest rate? A: Ideally you’d get a balance transfer rate of 0% p.a., or as close to zero as possible. More often, the rate charged will be in the range of 1-3% p.a. in Australia.
Q: How long does the introductory rate last for? A: You want as low a rate as you can get to last for as long as possible as the longer you are charged the cheaper rate, the less interest you have to pay and the more you stand to save.
Q: Will the bank charge a handling fee? A: Fortunately balance transfer fees are very uncommon in Australia, but it’s worth checking as any fee can negate your potential savings.
Q: When does the debt need to be transferred? A: Most people take immediate advantage of a balance transfer offer and include the details of their debts in their application. However, banks may give you up to 3 months leeway. Failing to use the promotional offer when applying for a new card means your outstanding balance, which will still be on your old card, will be charged the standard interest rate. Therefore, you would unnecessarily be paying interest instead of saving money.
Q: How does a balance transfer impact my credit score? A: In short, it depends. If you apply for multiple credit cards in a short period of time, and want to consolidate a large outstanding debt, your credit score will be lowered. This is further compounded if some of your applications have been declined and you continue to apply for more offers. It is best to spread out your applications for new accounts as much as you can while keeping your existing accounts in good order by not missing payments or spending too much.
Q: What about my credit limit? A: Your credit limit, or the amount of money you are allowed to borrow, does come into play. If you intend to consolidate debt from multiple accounts onto a single card using a promotional offer, you may not be able to transfer the entire outstanding amount because your credit limit is not high enough. Should this happen to you, you can still transfer as much of your outstanding balance as possible to take advantage of the low interest rate and work towards paying it off. If you manage to pay off some of what you owe on your new card and essentially free up some space on it, you could move some of the amount still owed from your old card to your new card, but most likely at a rate that is higher than the promotional rate. As long as you space out your applications adequately, you could apply for another credit card and move the rest of your outstanding debt to it.
Q: Does the card have an annual fee? A: Assuming that you want to apply for a balance transfer credit card and use the low interest rate to pay back your debt faster, you’ll also want to avoid other fees as much as possible. An annual fee is one such charge you would rather avoid. However, if you are planning to move a very large balance at a low rate, the impact of the annual fee is diminished because of the amount of money saved per month on interest alone. Conversely, if you are moving a relatively small debt, the annual fee may practically wipe out any potential savings. Ideally you are looking for a really cheap and prolonged balance transfer deal without an annual fee.
Q: In what order are payments allocated? A: Many people don’t realise that a bank doesn’t treat the amount owed as one single account. In other words, if you have transferred a balance at a low interest rate and use your new card to spend with, the bank will allocate payments to the cheapest debt first. So if you are not disciplined in your spending, you’ll not only be adding to your outstanding debt, but you won’t even be paying off the amount of money that was transferred. If you want to get rid of your debt, then don’t use your new balance transfer card to buy stuff!
However, there is an exception to this rule. Banks are now offering cards with a combined low interest rate on both balance transfers and purchases. Therefore, you would pay the same level of interest on any new purchases as you would on the amount of money that was transferred across. Still, the best thing to do is to avoid spending on your card until you are no longer in debt and can afford to pay off your monthly spend in full.
Q: Is it OK to use a balance transfer credit card to buy things with? A: This really depends on your financial situation. If you want to open a new account in order to pay less interest and use the money saved to pay off your debt, then no, it’s best not to spend with the card. If your new card has a combined promotional interest rate on balance transfers and purchases, and you can afford to pay for what you buy plus make a repayment on the debt, then you can use the card to buy with. However, in general it’s best to live within your means, pay off your debt first and only buy things with your credit card that you can pay off fully each month.
Q: Can you do an intra-bank balance transfer? A: No, generally this is not possible. If you already have a credit card at Bank A, you will not be able to transfer the debt to a new card with Bank A. Instead you will have to open a new account at a different bank and move whatever is outstanding to it. This may sound like a lot of hassle, but in reality it isn’t, especially because most banks do not charge a fee.
Q: What about minimum monthly payments? A: Yes, you still have to make the minimum monthly payment on your account. However, merely paying the minimum will mean that your debt will take incredibly long to pay off. While you can get away with just paying the minimum, it is better to overpay and aim to be debt free.

Live Stats on Credit Cards:

  • 107credit cards are ready for comparison and secure application
  • 17.15%is the average interest rate on purchases
  • $99is the average annual fee of any card in the market
  • 3.38%is the average balance transfer rate available
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