As the Christmas countdown begins and you prepare for the silly season of splashing out, your credit card debt is likely to be the last thing you want to think about.
But with the average credit card interest rate sitting at a steep 17.58%, moving your balance across to a 0% balance transfer credit card now can give you some much needed financial breathing room.
While there are 149 balance transfer (BT) offers on the market right now, we should point out there are a few traps to watch out for. So follow these 5 balance transfer rules and avoid a Christmas blowout.
1. Thou shall make a Xmas budget and stick to it!
Yes we know it’s the festive season and we don’t want to be the Christmas grinch but there’s no way to get around it, the first step to a debt free life is always creating a budget.
Workout how much you can afford to spend over Xmas without getting into more debt and whether you can repay that little bit more to rid yourself of debt sooner. You can use Mozo’s free credit card payments calculator to work out when you’ll be living a debt free life (Is 2015 your year?)
2. Thou shall pay the BT off in the interest free period
While the credit card provider may only require you to pay the minimum amount each month and you may think this is great with everything from the Christmas barbie to NYE celebrations to consider, don’t simply put your debt on layby.
To ensure you can pay off the entire balance within the interest free period workout what your monthly repayments should be. For example, if you move a $2,000 debt across to a 0% balance transfer offer for 6 months, you’ll need to budget for a monthly repayment of around $333 to pay the balance off within the interest free period. You may want to consider setting up direct debits, to ensure you never miss a payment.
3. Thou shall not spend on the BT card
Here we are again being the Christmas grinch but the whole point of a balance transfer credit card is to rid yourself of debt during the interest free period so don’t rack up more debt by using the card to make new purchases.
New purchases will be charged at the card’s ongoing purchase rate and because any payments must first go towards the highest interest accruing debt, your repayments will generally go toward paying off this new debt not the balance transfer debt.
For instance, if you spend $300 on the card over Christmas but keep your repayment at $333 for that month. $300 of the repayment will go towards paying off the new purchase and only $33 of it will go towards reducing the balance transfer debt.
Even if you have to freeze the plastic in a block of ice in your freezer, do it because it can be very tempting splurge on everything from Santa Claus costumes to ornamental deers at this time of year.
4. Thou shall know the revert rate
Before switching to a balance transfer card make sure you check the revert rate because many 0% balance transfer offers revert to a much higher cash advance rate (the average revert rate on BT offers is 19%), not the standard purchase rate.
So it’s a wise idea to search the balance transfer market for a BT credit card with a low revert rate like the St.George Vertigo that has a 0% interest rate for 14 months and reverts to a low 13.24% ongoing interest rate.
5. Thou shall not bounce from BT to BT
Signing up with too many balance transfer offers could end up impacting your credit rating. So use the balance transfer credit card to your advantage by paying off the debt within the 0% period and then keep up the savvy habit of always paying the balance in full each month to avoid the bite of credit card debt.
Some balance transfer offers available in the Mozo database:
ANZ Low Rate – 0% balance transfer rate for 16 months, then 13.49% ongoing interest rate
Westpac Low Rate – 0% balance transfer rate for 14 months, then 12.49% ongoing interest rate
Bank of Melbourne Vertigo Platinum – 0% balance transfer rate for 14 months, then 12.74% ongoing interest rate
See here for more.