Moving your credit card balance good for beating debt … in most cases

Thursday, 15 February 2018

One way to get on top of credit card debt.

It's about now that many people come to terms with the fact their Christmas credit card debt isn't going to pay itself off.

A balance transfer offer can be a way to deal with this problem.

The main banks all offer a low interest rate to people who transfer their credit card balances to one of their cards.

Take advantage of interest-free deals to pay off credit card debt.

BNZ and Westpac offer 0 per cent interest for one year on transferred balances. ASB has 0 per cent for six months.

ANZ is offering 1.99 per cent.

Westpac's deal includes another special rate of 5.95 per cent for any remaining balance after the year is up, until it's paid off.

'The deals make credit card debt repayment much easier and avoid 20 per cent-plus per annum interest rates on runaway debt,' said MoneyHub senior researcher Christopher Walsh.

'A simple balance transfer of credit card debt can relieve pressure on personal finances in the short-term and for the rest of 2018.'

How does it work?

You sign up for a new credit card with the bank offering the deal, or, in some cases, you can use a card you already have if you have accounts with more than one bank.

Then, you make a payment from your new card to the old one, moving the amount owing across.

The new bank usually needs to approve you for a credit limit that is a bit bigger than the amount you want to move.

Who does it suit?

Balance transfers are good for people whose credit card has got out of control due to a one-off big expense, or people who are committed to reforming their spending habits.

It helps if you have good credit.

Walsh said the banks would sometimes turn down someone who had a bad credit score. 'If you are refused, we recommend contacting your existing bank and asking them about any promotions available. If they have a low-interest option, you can ask to switch to that. You probably will skip most of the credit checks as you have an existing relationship with the bank.'

Who won't it work for?

A balance transfer is no good if you don't change your spending habits. If you transfer $10,000 but then rack up another $5000 on your now-empty credit card, you 'll end up in a worse position.

You need to be able to make more than the minimum payments on the bill each month.

'An interest-free debt is fairly rare, so you have the perfect conditions for repaying it. If the debt is $5000, budgeting $500 a month will have it paid in less than 12 months. Calculate what you need to repay per month by taking the debt amount, and divide it by 12 months. If it's higher than you can afford, pay the maximum you can,' Walsh said.

Jose George, general manager of research house Canstar, agreed a careful approach was needed: 'Credit card balance transfers deals can be beneficial if used well, but discipline around future spending as well as paying off the outstanding balance is paramount in order to get out of debt.

'That said, they should not be used as a long-term strategy to manage debt. If you're tempted to managed your debt by taking advantage of every deal that comes along, your credit score will be affected as it looks like you're avoiding your financial obligations. This could impact your ability to obtain anything from a mortgage to an energy deal.'

Anything else to watch for?

Before you sign up, make sure you understand the type of card you're taking out.

Sometimes the cards involved in balance transfer deals have higher annual fees than average.

Know what interest rate you'll end up on after the initial deal.

While some of the deals at the moment come with good ongoing rates, that is not always the case. If you haven't paid it all off within the time and you're facing a 20 per cent interest rate, you might want to roll on to another transfer deal. Close cards with nil balances - having a lot of credit cards can damage your credit history.

Check how any new purchases you make on the card will be dealt with. Usually, these will attract the card's normal rate of interest.

Often, your payments will be applied to the transferred (low-interest earning) portion of the bill first. That means that your new purchases could rack up significant amounts of interest before you pay down the card balance enough to get to them.

It is best not to use the card for anything else until the balance is cleared, to avoid this fish hook. Then you can start paying the card off in full each month, to avoid any interest at all.