Draw the Line: Separating Balance Transfers From Spending Cards
Posted August 4th, 2010 and last modified December 17th, 2010It is important that in the event that you do a balance transfer, you avoid spending on the credit card, as your purchases will typically be charged at the purchase rate without any interest free days.
As a way to draw in new customers, credit companies and banks almost universally now offer balance transfer deals. The most common arrangement is that any balance amount transferred will be charged at low or zero interest for around three to six months.
ANZ Low Rate MasterCard
The ANZ Low Rate MasterCard offers a low interest rate on purchases. One of the core benefits of this card, is that at the end of the balance transfer period, the interest charges will be at the standard purchase rate, not the cash advance rate, saving you a lot of money if you fail to repay your balance within the balance transfer period.
- $58 annual fee
- 0% p.a. for 3 months (reverts to 13.24% p.a.) on purchases
- 0% p.a. for 3 months on balance transfers
- Cash Advance Rate of 21.49% p.a.
- 55 days interest free
- Minimum Income Requirement of $15,000 p.a.
Read the ANZ Low Rate MasterCard – Balance Transfer terms and conditions.
The difference between these two types will mostly be seen in the period after the transfer deal runs out, when the interest rates are hiked to make up for the cheap period.
In most cases the zero interest deals will be for a shorter time and will have a higher non-deal interest rate.
Allocation of repayments
The standard card deal involving balance transfers will offer low interest on new purchases for a few months as well, but the reason why you should separate balance transfers from spending cards for new buys only becomes clear if you understand exactly how credit card companies and banks allocate repayments.
All the various items on your credit card bill will be charged at different rates of interest, and any repayments will be put towards paying off first the interest accrued, and the remainder will go towards paying off the lowest interest rate items.
What this means in practice is that if you transfer a thousand dollars at 0% interest, then spend 100 dollars at say 15%, paying back 100 dollars at the end of the month will not put you back in the original situation of only having $1000 at zero interest.
It means you will owe $900 at zero interest, and $100 at 15%, meaning the next monthly payment will be partially swallowed up in servicing the interest on the $100 dollar purchase.
For this reason it is vital to separate balance transfers from fresh purchases and keep new purchases to a minimum or only on dedicated spending cards.
Cash withdrawals are particularly dangerous, as they firstly often involve directly applied fees, secondly they are charged at higher rates of interest than anything else (meaning they are the last things to be paid off) and perhaps less importantly, but worth noting, they rarely earn any reward points.
Snowballing
Snowballing, or the process of shifting a balance to a new card whenever the deal runs out is becoming harder to do. It sounds like a good idea, and can still work for some people, but the behaviour shows up in your credit score and will harm it considerably if you do it more than once.
It is not illegal, and unlikely to become so, but the banks and credit companies are policing it themselves using credit analysis – if you plan snowballing as a strategy, and then are refused a new card you may be left with a high balance on the card offering the worst ‘after deal’ rates.
Plan ahead
The best way to take advantage of balance transfer deals is to be sure how long it will take you to pay off a balance, and maintain a separate balance transfers card and different spending cards for purchases if you still need the credit.
If you have received a financial boost, perhaps an inheritance or bonus, a transfer deal can be perfect, just put the money into a high interest return account for the duration of the deal, then pay off the balance with it just before the deal runs out. You can gain significantly in this case.
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