Balance Transfers or: How I learnt to stop worrying and drop the debt!

It’s the third week since we launched Mozo Answers and the questions just haven’t stopped coming! A big topic of conversation this week has been about debt consolidation, mainly squared around the best way to consolidate and pay off numerous debts as one.

There are a fews to do this, namely: using a credit card balance transfer, debt consolidation personal loan or through borrowing on your home’s equity. Each have different benefits and drawbacks depending on your circumstances, so I’ve run the rule over them to help give you a clearer picture.

Option 1: Credit Card Balance Transfers

In my opinion the best option is to take advantage of one of the balance transfer credit cards. Simply pay off all your debts with an existing card, then transfer the balance onto a new card with a balance transfer offer. Some cards are currently offering extremely low rates for long periods of time. For example, ANZ has 2.9% for 18 months, NAB has 0% till the end of the year and Westpac has 0.99% for 9 months on particular cards. Using a standard credit card* and an average credit card balance of $3,000, I used Mozo’s nifty Credit Card Health Check tool to run a few scenarios to illustrate the potential savings to be had.

Repayment Amount Cost on Standard Card Cost on Balance Transfer Card Total Savings Top Balance Transfer Card
$100 $1621 over 43 months $354 over 33 months $1267 and 10 months ANZ First
$250 $397 over 14 months $71 over 13 months $326 and 1 month Westpac 55 day Mastercard or Visa
$500 $197 over 7 months $9 over 6 months $188 and 1 month Westpac 55 day Mastercard or Visa
*CBA Awards credit card was used with an interest rate of 20.74% p.a. and annual fee of $89.00. Data correct as at 03/02/2011
 

As you can see, there’s a whole lot of interest to be saved. This is particularly evident in the first scenario, where making slow but steady payments of $100 a month on an ANZ First card could save you $1267 and a whole lot of time to boot. Conversely, if you’re paying it of in big chunks you’ll pay barely any interest at all with the Westpac 55 day Mastercard or Visa!

Option 2 – Debt Consolidation Personal Loans

Another option is to take out a debt consolidation personal loan. In short, you roll all your various outstanding debts into one loan which you then pay off at the rate set by the lender. They’re a decent option, but these loans tend to feature much higher rates than balance transfers. That being said, with some rates below 10% they are still potentially a lot cheaper than a credit card’s purchase rate (which can go as high as 23.5%) and are well worth looking into if you want to avoid the temptation of having another credit card in your possession.

Option 3 – Home Equity Loans

Finally, for those who have the option, a third avenue would be to look at borrowing from your home’s equity (for example line of credit home loans). This would allow you to consolidate your loans at a home loan rate much lower than what you would see in most personal loans. They won’t be as low as balance transfers, but if you’re looking for long-term solution it’s a very viable fix as the ongoing rate is far lower than that of a credit card – the flip side is that as the payment term is much longer you may end up paying more interest.

If you’ve got more questions or you’re a finance expert ready to do some answering yourself, head on down to the Mozo Answers forum.

Balance Transfers or: How I learnt to stop worrying and drop the debt! was last modified: June 18, 2012 by Yash Murthy

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  1. any ideas for someone who is unable to get a personal loan or credit card balance transfer (due to high debt amount)?? reply much appreciated

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