Understand how a balance transfer works and how you can use one to consolidate your debt without the cost of high interest
A balance transfer can be a useful consolidation tool if you’re struggling to repay a high interest debt. If you’re asking yourself “what is a balance transfer?” or would just like some more information about how one could help you repay your debt, this guide is for you. Here you’ll learn how a balance transfer works, how you can compare offers to find the right one for you and the benefits, features and terms and conditions you need to look out for.
What is a balance transfer?
Money expert Michelle Hutchison answers the question, ‘what is a balance transfer?’
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Hi, I’m Michelle Hutchison, money expert at one of Australia’s biggest financial comparison websites, finder.com.au. Today I’m going to talk about balance transfer credit cards.
So what is a balance transfer? It’s essentially when you have a debt from one card, say it’s at seventeen per cent, and you move that debt over to a new card offering a balance transfer rate of say, zero per cent.
Unfortunately these low rates won’t last forever and they generally expire and revert to a much higher rate. One consideration is that you can’t generally transfer that balance to a balance transfer credit card in the same institution. For example, say you have an ANZ credit card with a debt on it, you can’t transfer that debt to another ANZ credit card but you may be able to transfer it to another bank or institution.
You can transfer a debt from credit card, store card, charge card, it’s a really good way of consolidating all your debts into one line of credit.
Balance transfers can be a great way to save loads in interest and pay off your credit card debts, and while you can apply for as many as you like, keep in mind that applying for too many in a short space of time can impact your credit file.
Think of it this way. You move your credit card debt from card A to card B with a special rate of interest on card B.
A balance transfer is a feature for new credit card customers. It allows someone who is applying for a credit card to bring their debt from their old card over to the new card under a promotional rate of interest. This is an attractive option because the balance transfer promotional interest rate is almost always lower than the annual percentage rate of interest (apr) charged on their existing credit card.
A lower rate of interest charged on your credit card balance means you pay less money towards covering the interest repayments, and you can pay down the principal balance quicker.
Learn more about Credit Card’s APR (Annual Percentage Rate) here
What is a balance transfer rate?
What does ‘balance transfer promotional period’ and ‘promotional rate’ mean?
The ‘promotional balance transfer rate of interest’ is simply referred to as the ‘promotional rate’. It’s called a ‘promotional’ rate because you’re entering into a special promotion with the credit card provider – for a limited period of time. This ‘limited time period’ is known as the promotional period, or ‘promo period’ for short.
The promo period and promo rate together make up the balance transfer offer.
Take the example of a credit card with a balance transfer offer of 0% (0 apr) for 6 months.
This means that you can apply for the card, transfer over your card debt, and you won’t get charged any interest on that debt for six months. You have six months to pay down as much of the debt as possible before the bank or lender begins to charge interest.
What is a balance transfer revert rate?
What happens after the promotional period expires? The revert rate kicks in. but what is a revert rate?
The revert rate is the ongoing interest rate the bank charges you at the end of the promotional period. It’s either the purchase rate of interest or the cash advance rate of interest. Each credit card provider is different.
The difference between the cash advance and purchase rates of interest can be as great as 10% with some credit cards. If you don’t think you can pay down the entire balance by the end of the promotional period, it pays to have a look at the revert rate when you’re comparing balance transfer credit cards. While most lenders charge balance transfer balances at the purchase rate after the promotional period expires, some do charge at the cash rate.
Learn more about balance transfer revert rates by provider here
A balance transfer can save you money and help you gain control of your debt
Look at this example to see how a balance transfer can save you money.
You have a credit card with an outstanding balance of $5,000. Your bank is charging 17.00% p.a. interest on this balance.
You apply for a credit card with a balance transfer rate of 0% for 12 months and elect to transfer a balance from your old card. If you run the numbers, by transferring to a card with a balance transfer rate of 0% for 12 months, you’re saving yourself $850 in interest repayments – $850 you can put towards paying down your credit card debt.
Have a look at our balance transfer credit card comparison table below. You enter your outstanding balance at the top of the table, and you will be able to see what each balance transfer offer can save you in interest repayments over the life of the promotional period.
Compare Balance Transfer Credit Cards
Rates last updated September 28th, 2016.
- HSBC Platinum Credit Card
$0 annual fee + 0% for 15 months on balance transfers offer extended until 31 December 2016
September 1st, 2016
- American Express Platinum Edge Credit Card
Standard 10,000 bonus points offer has replaced the 30,000 bonus points exclusive offer.
September 1st, 2016
- Virgin No Annual Fee Credit Card
Balance transfer offer has been extended to 31 October 2016.
September 26th, 2016
How to use the Balance Transfer Calculator in 4 easy steps and learn how much you can save today
Step 1. Enter the total debt/outstanding amount you would like to transfer
Step 2. Provide the interest rate that you are paying on your existing debt (if you don’t have your interest rate on you, the average is around 18-20%)
Step 3. See the ‘Interest Saved’ column to find out which credit cards will save you the most money. Click on the ‘Interest Saved’ title to sort the cards in ascending or descending order of money saved
Step 4. Compare the credit cards available in the table provided to find the card that suits your needs. If you still want to find out more about a particular credit card, click the ‘More info’ link for a full review on the features and benefits.
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Frequently asked questions
Here are some of the questions we get asked about balance transfers, and their answers.
How do I know if I’m eligible for a balance transfer?
What accounts can I include in a balance transfer?
Some providers will even let you transfer a balance from an overdraft account or a personal loan.
How much can I transfer?
Another key question, this all depends on your approved credit limit. Each credit card provider has different rules about how much they will allow you to transfer to one of their credit cards, but it’s generally up to a percentage of your approved credit limit.
For example, if you’re approved for a credit card with a credit limit of $10,000 and the lender allows you to use up to 95% of your credit limit towards a balance transfer, you can transfer up to $9,500 from your old account.
Do I have to close my account after I transfer a balance?
How long does it take?
Is there a fee for transferring a balance?
The majority of balance transfer credit cards do not charge an additional handling fee when you transfer a balance, although balance transfer fees do come into the market from time to time.
A balance transfer fee is expressed a percentage of the amount you wish to transfer. For example, transferring a $1,000 balance with a balance transfer fee of 3% leave you with fee of $30. This is charged to the credit card and can be paid in a lump sum or paid off over the length of the balance transfer promotional period.
This fee will be clearly stated in the terms of the offer and should factor in to your comparison of balance transfer credit cards.
How will my repayments be applied?
If you transfer a balance to a credit card, if possible, you should avoid any new spending on that credit card.
If you do spend on the credit card, your account will attract different rates of interest.
There’s the balance transfer promotional rate of interest (usually the lowest apr).
If you make a purchase, the purchase rate of interest will apply, and if you carry out a cash transaction (like withdrawing cash from an ATM), the cash advance rate of interest (the highest apr) will apply too.
So if you have three different rates of interest charged to the one account, and you make a repayment, which apr balance will be paid off first?
The balance attracting the highest apr will be paid off first, then the balance that attracts the next highest apr and so on. This is why it’s never a good idea to spend on a credit card after you transfer a balance, and you don’t think you can pay back the new charges right away. Any repayments will be applied to the charges that attract the highest apr of interest first, therefore reducing the amount of time the balance transfer balance has to accrue interest at the promotional rate.
How do I apply for a balance transfer?
To apply for a balance transfer, go through the process of applying a credit card. This can be done online, over the phone or in person. There’s a section in the application where you’re asked whether or not you want to transfer a balance from another account. Select, or answer, yes, and you’ll then be prompted to enter the account number, the amount you want to transfer and the name of the institution you’re transferring from. If you’re approved for the account, you’re approved for the balance transfer.
Do I get any interest free days if I transfer a balance?
You don’t get any interest free days on purchases when you carry a balance transfer balance on your credit card. If you use the card to make a purchase, interest will be charged from the day of the transaction. This is another good reason not to spend on a credit card that’s carrying a balance transfer balance.