Promotional offers to avoid crippling credit card debt are useful, but not free.
There is no such thing as a free credit card balance transfer. At first blush, it may sound tempting to wipe out your card debt by taking up a low or no-interest offer on balance transfers from a credit provider, but there will be costs.
Sometimes switching cards is not worthwhile as the costs and new spending offset any savings you thought you might make by avoiding your existing card’s interest rate.
And while comparison site Canstar says there is no limit to the number of times you can relocate your card debt to reduce the interest you pay, all balance transfers are recorded against your credit rating. Which means that if you apply for a loan down the track, the lender will see that you have a habit of avoiding your interest dues and consider you a sub-prime customer with a high risk profile. As a result, the lender may not want to do business with you.
But if you are frugal and determined to reduce the debt rather than let it grow on the new card, then it may mean you can achieve virtually free credit on the transferred balance.
We did this several years ago by splitting our unmanageable credit card debt between two different accounts from a provider that had an incredible deal – an indefinite interest rate that was a quarter of what we had been paying.
When the new credit cards arrived, we cut them up and threw them away to ensure we were not tempted to spend on them. If we had used them for purchases, those amounts would have attracted a double-digit interest rate. We decided to get rid of the old debt in less than three years and stuck to our guns. After dividing the two balances by 24 months, we set up a direct debit from our savings account to cover the two monthly payments. We surmised that by the end of two years, we would be close to having knocked the debt on the head. Our set-and-forget strategy bought us a great peace of mind.
According to comparison site Canstar, you need to know what costs you may be up for if you switch to a low-interest card in order to calculate if you will get on top of your debt or add to it. This is what you should look out for:
- Balance transfer fee – some cards charge a fee of up to three per cent of the balance being transferred
- Annual card fee – some cards charge a fee of up to $700 a year
- The purchase interest rate – any new purchases made using a balance transfer card will be charged the purchase interest rate, which can be up to 24.99 per cent a year
- The revert rate – if you don’t pay the debt before the promotional period ends, you could pay an interest rate of up to 21.99 per cent a year.
Work out how much interest you will pay on your existing card for the duration of the other card’s promotional period. Calculate any transfer fees that you will be charged if you switch, add the new card’s annual fee and, if you intend to use the new card for purchases, also add an estimate of your forecast spending amount, and the higher interest rate you will incur.
If you calculate that your savings will still be significant, then switch away.
Have you ever switched a credit card balance to a new provider to minimise the interest you pay? Has a credit card provider ever refused you a chance to transfer a balance? How do you avoid getting out of control with your credit card debt?