A fee-for-all: The balance transfer trend you need to be aware of
A balance transfer card is supposed to help Aussies finally conquer long-term credit card debt, but could it actually be compounding it instead?
Balance transfer cards allow you to transfer all of your previous credit card debt onto one, easily managed plastic and generally come with lengthy interest free periods so that you’re able to pay off just your debt and skip out on costly credit card interest.
The catch? An increasingly prolific trend among lenders to impose a balance transfer fee onto new cardholders as a percentage of the transferred amount.
In the last 12 months the Mozo database has seen the number of balance transfer fees on these plastics double - a worrying trend that makes it all the more important to check the fineprint before you get your hands on one of these cards according to Mozo Director, Kirsty Lamont.
“If you are looking at a balance-transfer deal it’s really important to check the fine print for establishment or handling fees,” she said.
“They charge an upfront cost of the per cent of the balance you transfer so make sure you choose a card without this fee or your first repayment will just be going towards this fee rather than paying off the debt.”
How much could the balance transfer fee cost me?
Just under half of the balance transfer cards in the Mozo database at the time of writing come with one of these pesky establishment fees - but how much will it truly cost you?
Well, balance transfer fees are calculated as a percentage fee (usually 1-3%), so it really depends on the amount of debt you’ve accrued.
Scenario: Bob needs a balance transfer card, pronto
Years of bad plastic habits has seen Bob rack up $4,400 worth of credit card debt, which is the average amount for an Aussie cardholder according to ASIC’s credit card debt clock.
He wants to give himself as much breathing room as possible and so has opted for the a balance transfer card that comes with a lengthy 24 month interest free period, a $100 annual fee and a 2.50% balance transfer fee.
If Bob were to transfer his debt onto this card, the first $210 worth of repayments would be going toward the card itself and not his debt - poor Bob.
Another balance transfer trap to avoid
Another major stumbling block for balance transfer customers is avoiding the temptation to make any additional purchases with your fresh piece of plastic.
This is because, while the interest free period applies to your transferred debt, it doesn’t cover any new purchases you make with the card meaning you’ll be charged at the pricey purchase rate and start paying that off immediately, rather than your debt.
And with recent Mozo research showing that we’re increasingly using our credit cards for everyday expenses like the groceries or to pay bills, Lamont has urged Aussies to stick to their repayment plans and resist the urge to splurge.
“Having a plan for how to stay on track, resisting additional purchases and knowing how much you should be paying back every month to meet your goal is really important for Aussies with this type of credit card.”
If you think you can kill spending temptation and make the most of a balance transfer deal, best head over to our balance transfer credit card comparison table to find some of the lengthiest interest free periods on the market - just remember to check the fineprint!