There are pros and cons when it comes to switching debt between credit cards.
Transferring money between credit cards can help kick the debt cycle, or, it could push you further into a credit trap.
Keeping tabs on the good and bad points of credit card balance transfer offers can help you make the best decisions towards getting out of debt.
Let’s start with the positives:
A balance transfer credit card offer may be a great way of pooling together all your debts into one lower interest rate loan.
As well as a better deal on interest, you may also find yourself saving on fees and unwanted service charges.
Related: When interest is not so free
Low to zero interest
You may be able to secure a great deal on existing debt for a short period, but don’t use the opportunity to spend more. Rather, use your short-term reprieve to help you get back on top of repayments and out of the debt cycle. Us it as an opportunity to pay down your debt without accumulating any added interest on the amount owing.
The best way to take advantage of credit card balance transfer offers is to set automatic repayment schedules or direct debits to ensure you pay off all or most of the debt by the time the introductory low rate period is over. Calculate how much you need to pay to ensure you get the most from your low rate balance transfer offer and set your target accordingly.
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Time periods to suit your credit history
If you think it’s going to take you a year to repay your debt, don’t choose a rock-bottom interest rate with a six-month period. Flexibility to match your habits can help you get the most out of your balance transfer credit card offer.
For instance, you could choose between the ANZ Low Rate card offer of 0% p.a. on balance transfers for 9 months, or instead go for the HSBC Credit card offering 0% for 6 months (limited time!).
Transform your credit history
You can use your honeymoon period and lower payments to start getting back on track with your credit history. Some good habits are to pay more than the minimum and pay just as your statement is due, if not before.
Related: How to stay out of credit card debt
But of course there are also a few negatives you will need to try and avoid:
Failing to pay
If you don’t pay down the debt transferred within the period, you could end up owing much more than you expected. Check what the interest rate will revert to (default to) as well as any penalties you may incur rather than focusing on the honeymoon offer only.
Also check to see if default rate is applied to the debt transferred from the initial date of transfer if it's not paid in full by the end of the honeymoon period.
The new spend
Is your new spending attracting a higher interest rate than you expected? Some credit cards may offer attractive rates for rolling over your debt and then sting you with higher interest for new purchases.
Related:Which credit card is best? Help me choose
The lazy danger
You could get yourself into more trouble if you fail to pay off the debt transferred, and then add insult to injury by using the new card for additional purchases too. The banks know you will be enticed with low balance transfer offers and hope to retain you as a long-term customer. So forget about short-term gains and look for the best deal for your overall circumstances.
Moneyhound makes it easy to compare balance transfer credit cards buy showing you all them in an easy to read table format here.
When choosing your credit card limit don't take as much as you can get, be sensible and make sure you don't give yourself the opportunity to spend more than you earn.
Multiple interest rates
If you’re transferring debt from more than one card, different rates may apply for each of those sums. Check the fine print to make sure multiple balance transfers are not attracting different rates. Your low interest rate may only apply to the smallest balance transfer. Luckily, since July 12, 2012, the lowest rate applies to the biggest transfer.
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Interest-free grey areas
Your new credit card may have no loyalty period when it comes to transfers from other cards. Widely lauded interest-free days may not apply to existing balances and interest could be being charged immediately from the date of purchase.
If you closely compare credit card balance transfer offers before you apply, you can use them to help you get out of debt. So long as you're aware of the dangers, and can trust yourself to pay down the debt as quickly as you can they can save you hundreds of dollars in interest.
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