Transferring your balance to a credit card with a lower rate of interest can be a great way to save money – but watch out for the small print
If your current credit card is costing you a fortune in interest, you should consider switching to a credit card with a low rate of interest. A balance transfer is the most sensible option for people looking to get a break from their credit card’s interest repayments and there are tons of great balance transfer deals out there, many with 0% promotional interest rate.
Balance transfers subject to higher rates of interest
Credit cards offering low interest rates on balance transfers often hide important information in the small print. The easiest mistake to make is to think that, once the low interest rate period ends, any outstanding amount from your balance transfer will revert to the lower advertised interest rate. This is not always the case.
Low Interest Credit Card from St.George
St.George offer a low interest credit card called the St.George Vertigo Visa. It will give you a low interest rate on both purchases and balance transfers, and is a great card to consider if you are looking to switch credit cards.
- $55 p.a. annual fee
- 1% p.a. for 12 months (reverts to 13.24% p.a.) on purchases
- 0% p.a. for 18 months on balance transfers
- Cash Advance Rate of 21.49% p.a.
- Up to 55 days interest free
Your lender may not overtly announce this fact, but cards on the market are split pretty evenly between those that charge at the purchase rate and those that charge at the cash advance rate of interest on any balance transfer not paid off at the end of the promotional period.
Some credit card providers do not even mention this in the small print. – which is a shame, because it’s a big deal – the difference in the cash advance and purchase rates can be up to 10%. So make sure you read the terms and conditions and if you’re still not sure – ask your lender.
Here’s an example of how big a difference it can make. Say you have transferred your balance to the St.George Vertigo Visa and, after the nine month promotional period of the quoted rate, you still haven’t paid off the debt. The interest will be charged at the purchase rate of 13.24% p.a., which comes to $397.20. If it was charged at the cash advance rate of 21.49% p.a., as it is with many credit cards, it would come to $644.70. You’ve just saved $250.
So, again, if it doesn’t specify in the small print, be sure to ask.
It’s also worth noting that the special rate for balance transfers may only apply to the first transfer you make. Any balance transfers you make after that will be subject to the cash advance rate or the purchase rate, depending on the card.
Pitfalls with interest free days
Many credit cards advertise a 55 day or similar interest-free period. But if you read the small print, you’ll often find you won’t benefit from this interest-free period if you haven’t paid off your balance transfer debt. In other words, until you have paid off your balance transfer in full, you will be charged interest as soon as you make a purchase. This may mean tightening your belt until you’ve paid off your balance transfer debt.
Look to the future
Don’t be dazzled by low interest rates for a fixed period. Some offers start with a very low interest rate for the first few months, but then go up to a much higher rate. If you think you’ll need low interest rates over a long period, you may want to find a better balance for the longer term. However, if you’re struggling financially now but believe you’ll be in a better situation within a few months, then a very low rate of interest for a short period, reverting to a higher rate later, may be the way to go.
The most important thing is to give yourself a financial health check and go for the card that’s going to suit your personal circumstances.
Other things to remember – Balance transfer FAQ’s
Most credit card companies will only accept external balance transfers. For example, if your existing provider is ANZ, you will not be able to transfer your balance to another ANZ credit card. Remember, some banks are owned by larger banks. St.George, for example, is part of Westpac.
Normally balance transfers cannot exceed 95% of the credit limit. So, if you want to transfer a balance of $4000, for example, your new credit card will need a credit limit of at least $4,200.
Interest free periods do not apply to balance transfers. You will accumulate interest on your balance transfer from day one.
Remember, most balance transfers require a good credit rating. Also, you might find that you can’t get as high a credit limit on your new card. You need to decide whether it is worth the trade off for lower interest rates.