Paul Clitheroe
Paul Clitheroe

Card balance transfers are good if used properly

IT'S around about now that our credit statements start arriving in the mail. For some of us our card balance will be bloated from last year's festive season spending. Switching to a new card offering a special balance transfer deal can be tempting but be sure to crunch the numbers as you could find yourself worse off.

Balance transfer deals involve paying out your existing credit card with a new card charging special low rates for an introductory period.

These deals generally fall into one of two categories - those charging zero interest for a short period, usually six months, and those that charge a low introductory rate for longer periods of up to a few years.

The trick is deciding which offer will work best for you. This will depend on the size of your debt and how much cash you can throw at the balance before the low rate period expires. It's important to make good use of the introductory period because once it ends the interest rate (known as the 'revert' rate) can jump to 20% or more.

As a guide, a 0% deal sounds tempting but these are generally better suited to paying off smaller balances. The typical honeymoon period on 0% offers tends to be around six months - an ambitious timeframe to pay off a substantial debt.

If it's unlikely you'll be able to pay off the card balance within six to nine months, you may be better off with a card that charges a low introductory rate for a longer period. Some balance transfers involve a rate of less than 5% for up to two years, which is a more reasonable time to whittle away your outstanding card balance.

In either case it's critical not to rely on the minimum repayment monthly figure that appears on the card statement. Use your budget as a guide to what you can repay and stick with this, or simply pay off as much as you can while the rate is low.

Balance transfer deals can be a useful solution but they are not for everyone. They do nothing to break the cycle of overspending that often gets us into trouble with card debt in the first place.

Here's a really important tip. Once you transfer your debt from your old credit card to your new, lower rate card, cut up the old card. If you keep it, you may be tempted to load it up with debt again, in which case you could end up with two card debts, not one. This is to be avoided at all costs.

There are other traps too. You may face limits on the amount that can be transferred to the new card - in some cases it can be 95% of your current credit limit, meaning you may still have a balance outstanding on the old card even after you take up a balance transfer offer. This is definitely something to check before you switch to a new card.

If you are facing solid card debt, it can be just as effective to simply knuckle down and pay it off. Leave the card at home when you're out shopping, and aim to pay for purchases with cash until your card balance is under control.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.



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