Balance transfer cards explained, at last

If you’re feeling overwhelmed by growing credit card debt, you’re not alone. According to June 2022 RBA data, Australians accrue interest on $18.2 billion in credit card debt each month, with an average card balance costing interest of ​​$1,380.

Rather than struggling to pay your debt back on your current card, another option is to transfer that balance to a new credit card with a competitive balance transfer offer. That brings us to the critical question of…

A balance transfer is when you transfer your existing credit card debt to another card with a much lower interest rate (or balance transfer rate), which is often even 0% for a limited period.

Without large interest payments taking a chunk of your money each month, you have the ability to chip away at the balance of your debt faster.

A balance transfer can be a simple way to help clear credit card debt, but before jumping in head first, there are some things to keep in mind.

An important thing to remember is that while a credit card may advertise a 0% balance transfer deal, the offer is only available for a honeymoon period, ranging from 3 months up to 26 months.

If you take advantage of one of these offers, your balance will roll over from your existing credit card to the new BT card. While the provider aims to get you as a new customer, if you’re thrifty, your goal should be to take advantage of the interest free period and use the BT card to pay off your debt before the honeymoon period comes to an end.

Moving your balance across from your current credit card to the new card is pretty simple. When you apply, you’ll be asked for the details of your current credit card, including the name of the bank where your card is held and the card number. If approved, the provider will pay out your old card to $0 and roll it over to the new card.

Just be sure to cancel your old card as soon as the balance is transferred. Otherwise, that old credit card could keep drawing on  your bank account, as it could continue to charge you any ongoing fees or penalties that may apply.

Generally, the new provider will only allow you to transfer up to 80% of the new card’s standard  limit. This means if you’re looking to transfer a debt of $4,000, for example, you will need to get approved for a new credit card limit of at least $5,000.

You might be tempted to switch credit cards thanks to an enticing 0% balance transfer headline rate, but keep in mind while some card providers charge no balance transfer handling fees, others regularly charge 1-3% of the balance you’re transferring.

Example: To keep things consistent, let’s use the average Aussie balance of around $3,000.* If you transferred that over to a card with a 3% handling fee that will cost you $90.

In general, these handling fees are found on longer-term BT deals eg. between 18 and 26 months. So, if you know you can pay off your debt over a shorter timeframe, you’ll be better off going with an interest free BT deal with no balance transfer handling fees.

The key benefit is savings. As well as clearing your balance sooner, you could potentially save hundreds of dollars over a year by moving your debt over to a 0% deal.

Example: For example, if a person with the average credit card balance in Australia of around $3,000, took advantage of the balance transfer offer and paid off the balance in full during the 0% period, they could save up to $595 in interest over 12 months. But that’s only if you use the balance transfer card the right way, as there are some common pitfalls to avoid…

While a BT credit card can be a helpful product to pay down debt, here are some of the things to steer clear of:

• Applying for multiple balance transfer deals. Did you know every time you apply for a credit card it leaves a footprint on your credit report? So, to ensure you’re in a good position to be approved, it’s a good idea to check that your credit score is in good shape before you apply. The Australian Government lists some of the websites that allow you to download a copy of your credit report here.
• Failing to make a balance transfer repayment budget. It might be tempting to only pay the minimum repayment amount each month, but this will mean your debt is still hanging around when the promotional BT period ends. In other words, that 0% interest rate will revert to a higher ongoing purchase rate - the average being 17.04%**. So take the time to work out how much you’ll need to pay each month to blast the debt within the BT period.
• Spending on the balance transfer card. You might think when you receive the new plastic in your pocket, it’s time to put it to good use but this will only mean it will take you longer to pay off your debt. The reason is because any new purchases have to be paid off first and you’ll also incur the higher purchase rate. So if you’ve worked out you need to pay $380 a month to pay off your debt before the balance transfer period comes to an end but then rack up $200 on the new card, that month you will have only paid off $180 of your original debt.
• Example: For instance, say you take out a card with a 0% balance transfer deal for 12 months, if you have the average balance of $3000* you would need to make a monthly payment of $250 to pay off the debt before the BT period comes to an end.
• Withdrawing cash from an ATM on your balance transfer card. Withdrawing cash is something to avoid altogether when it comes to any credit card. There are two main problems with making cash withdrawals on your balance transfer card that could see you slip further into debt: Firstly, you’ll be charged the card’s cash advance rate. These rates are notoriously high, often reaching 20% and over. Secondly, credit cards usually come with a set number of interest free days, which are a set number of days (usually either 44 or 55 days) in which any new credit card purchases you make will not incur any interest charges. Unfortunately, this doesn’t apply to cash withdrawals, so you’ll incur interest from the day you withdraw from the ATM.
• Falling back into old habits after paying off the balance transfer. After all that hard work ridding yourself of debt, stay on track by creating a budget to ensure you’re only spending what you can afford to pay back. Making a sticking to a budget can be simple with a budgeting app.  Also, make sure you pay the balance in full and on time each month to avoid the bite of interest and late payment fees. We recommend setting up a direct debit from your bank account to your credit card provider to ensure you never miss a payment.

On Mozo of course. We have two helpful ways you can track down a BT deal that suits you: 

*Mozo estimates, as of 6 September 2022, based on RBA monthly credit card statistics and ASIC's Credit Card Lending in Australia report.

**Average purchase rate for all personal credit cards on the Mozo database is 17.04%, as of 6 September 2022.