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Credit card balance transfers: new year, old debt

If you’re starting the New Year with a credit card hangover, now is the time to put a debt-busting plan in place. In partnership with money comparison site Mozo, we’re pleased to bring you the dos and don’ts of credit card balance transfer tricks.

Credit cards are rarely a debt that can be paid in full and if you’re finding yourself paying a lot of money in interest charges, then a balance transfer credit card may be something to consider as long as you meet the credit criteria.

What is a balance transfer credit card?

A balance transfer credit card is a card that allows you to transfer all or part of your current card debt onto another credit card company’s credit card at a lower promotional rate for a specified period of time. The advantage of using a balance transfer card is that you may be able to save money on interest payments while still having access to funds when you need them. However, once the lower transfer interest rate period ends, you may likely be looking at an interest rate on balance transfers of over 20%.

Balance transfer tricks

One debt-crushing option that might be available to you is a ‘0% balance transfer credit card.’ With a balance transfer card, you get to move your existing credit card balance – where you could be paying an annual percentage rate as high as 20% or more – to a new credit rate card where, for a set promotional period, your balance is subject to a set number of interest-free days.

Instead of your minimum repayments being eaten up by interest charges, this means that 100% of your repayments can go towards paying down your credit card balance.

credit card balance transfers: new year, old debt

Sounds awesome, right? Balance transfer cards, when used properly, can be an effective way to clear debt, but there are still some dos and don’ts you’ll want to be aware of before signing on the dotted line. MyBudget has partnered with money comparison site Mozo to bring you these credit cards balance transfer period tips.

Create a budget so you know what you can afford to repay

Before looking into balance transfer tricks and applying for a card, it’s best to first figure out what you can afford to repay. After all, there’s little point in getting a new credit rate card with no goal in mind of how you intend to pay it off. Your budget should outline how much you owe and how much you’re able to repay each monthly repayment until you’re debt-free. Here’s how to make a budget.

Free online calculators, like Mozo’s Credit Card Debt Monthly Payments calculator, can give you an estimate of what your debt-free timeframe might look like.

Compare your balance transfer options

Can you transfer debt from one credit card to another? Balance transfer deals are usually first-out-the-gate in January. It’s a chance for banks to gain a new credit card customer, and it’s your opportunity to snag a great balance transfer deal.

Because you’ve worked out your budget, you’ll know what kind of limited time period to look for in a balance transfer deal. While some transfer offer periods can be as long as 24 months on balance transfers, if you need only nine months to pay back your credit card debt, you may want to consider a 12-month window instead.

You can always do some first-hand research by comparing variable rates with a balance transfer calculator. This way, you can compare a variety of factors, such as promotional interest rates, grace periods, bank fees, exclusive offers, etc.

Avoid paying transfer fees, if possible

Keep in mind that some balance transfer cards come with upfront balance transfer fees, or even just a one-off balance transfer fee. This is the cost to move your balance over to a new rate credit card and it’s usually one to three percent of the outstanding balance.

If you can avoid paying a transfer fee, do. With enough research, you can find a credit card that doesn’t charge a balance transfer fee.

Understand the revert interest rate

What happens when you transfer a balance on current credit cards and the honeymoon promotional period with that introductory interest rate ends? When comparing deals, make sure you keep an eye on the revert interest rate after the introductory period. When the interest-free period ends, this will be the interest rate that applies to any remaining balance on the card.

Some cards will revert to the cash advance rate, which can be as high as 20+% per annum on the remaining unpaid balance transfer amount, while other deals will revert to the standard purchase rate for that card.

Break up with your old card

Once you’re approved for a new card and the funds get transferred, do yourself a massive favour and cancel your old credit card immediately. Other than the fact it’ll keep you from using the old card, you’ll also save a few bucks by not having to pay the annual card fee.

Balance transfer tricks: What not to do…

Don’t spend on the new card

Can you transfer debt from one credit card to another? In short, yes. However, the law requires that your credit card repayments must first be applied to that portion of the entire balance attracting the highest rate of interest. In other words, if you make retail purchases on the new credit provider’s card, your repayments will go towards paying this credit card in full first and your transferred closing balance second.

A person passing their credit card to a waiter to pay for their meal

If you do transact on the new card, make sure that you increase the number of your repayments to cover your new purchases, as well as the minimum payments towards your old balance. It also goes without saying that the interest rate on purchases can tend to be very high.

Don’t apply for multiple balance transfer credit cards

It’s understandable that you’re determined about paying your credit card in full, but it pays to be patient during the application process. Every application you make for credit is recorded on your credit history and applying for multiple credit cards can have a negative effect on your credit rating, especially if you do not meet the credit provider’s eligibility criteria. It can also take months from card approval from the financial institution and credit card provider to start seeing a dent being made in the balance. Progress is being made, just be sure to check every credit card statement period just how far you’ve come. Therefore, if you’re in immediate financial hardship, this strategy may not be exactly what you’re looking for right now.

FURTHER READING: Alternatives to a debt consolidation loan

For the sake of your credit score, the best approach is to shop around before you submit a new credit card application. You can search and compare promotional balance transfer offers and their promotional balance transfer rate based on your debt amount, desired balance transfer period and late payment fees on free comparison sites, such as Mozo, without putting a mark on your credit report.

But remember, for more specific financial advice, legal advice and all-round professional advice, perhaps consider seeking out a financial counsellor or legal aid solicitor.

Don’t repeat history

Once you’re successful in paying your credit card in full (congratulations!), you can now put those payment plan funds towards building up your savings, as opposed to simply signing up for another credit product. Adopting new saving habits and crafting a budget will help ensure you stay debt-free and you’re able to reduce your credit card balance every month. All of these will help improve your credit rating! Plus –don’t forget to set up an emergency fund for unexpected bills.

Still not sure what happens when you transfer a closing balance on credit cards? Want to improve your credit rating by paying off your personal loans and other debt? Call MyBudget on 1300 300 922 or enquire online to get your free customised debt repayment plan.

This article has been prepared for information purposes only, and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this article you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.