How to banish your festive debt regret with a balance transfer card
Tuesday 28 January 2020
Although the Christmas tree may be long gone, packed away in the loft with the tinsel and baubles gathering dust, there’s one thing from the festive season that you might still be feeling the effects of: credit card debt. In fact, according to a recent report by Mozo, Australians currently have a whopping $27.2 billion of credit card debt racked up, accruing interest.
The good news is, if you are one of many dealing with the stress of a festive spending hangover, then you might be interested to hear that with the right balance transfer card you could save yourself over $400 in repayments.
Mozo’s research found that by taking advantage of a 0% balance transfer card to banish your debt, rather than sticking with a standard interest-accruing credit card, you could save up to $468 on repayments. Of course, as with anything you have to be smart about it, but if you are and you avoid all the loopholes that come with any kind of credit card, you might just beat the system and save yourself a tidy sum of money (more on this below).
As Mozo Director, Kirsty Lamont said, “For those that have over spent throughout the year or over the festive season, a 0% balance transfer card is a great way to blast your debt. By centralising your debt in one place, all your payments are going towards paying down the balance on the card with no interest being charged”.
Balance transfer cards to consider
Mozo’s team of data experts crunched some numbers and figured out which balance transfer cards in the Mozo database might be worth considering.
By using the $4,200 worth of expected December credit card debt as an example and comparing the repayments owed on a 0% p.a. balance transfer card with the average 17% p.a. interest* rate on a standard credit card, our experts figured out that the following three balance transfer cards from Citi, Bankwest and HSBC might be worth putting on your shortlist:
- 0% balance transfer rate for the first 26 months
- 1.50% balance transfer fee
- $149 yearly fee ($49 for the first year)
- 21.49% purchase rate
- 22.49% revert balance transfer interest rate after 26 months
- Possible savings $439
- 0% balance transfer rate for the first 26 months
- 2.00% balance transfer fee
- $99 yearly fee ($49 for the first year)
- 12.99% purchase rate
- 12.99% revert balance transfer interest rate after 26 months
- Possible savings $468
- 0% balance transfer rate for the first 22 months
- $129 yearly fee (refunded if you spend over $6,000 p.a.)
- 19.99% purchase rate
- 21.99% revert balance transfer interest rate after 22 months
- Possible savings $442
How to be smart about banishing your debt with a balance transfer card
Of course it’s one thing to be approved for a balance transfer card, but it’s quite another thing to actually make the most of it and get rid of your debt. Here are a few simple rules to stick to, so that you don’t find yourself still struggling with debt come Christmas 2020:
1. Do NOT make any purchases with your balance transfer card
You may enjoy zero interest rate on balance transfers, but all balance transfer cards can still be used as credit cards and as such come with a purchase rate. So for instance, although you would pay 0% interest on balances transferred from another credit card for 26 months with Citi’s rewards balance transfer card, if you fail to pay off your new purchases before the statement period ends, there will be no grace period, meaning you could be hit with a 21.49% interest rate. This is because interest free days do not apply while you’re benefiting from that sweet 0% interest rate on your balance transfer.
With this in mind, the best thing to do is simply to NOT make any new purchases with your balance transfer card. In fact, don’t even think of it as a credit card, think of it as a means to make yourself debt free sooner. To avoid temptation you might even want to leave it somewhere out of reach, say at home frozen in a block of ice in the freezer, Confessions of a Shopaholic style.
2. Figure out exactly how many interest free months you need
Be realistic, use an online calculator to figure out exactly how many interest free months you’ll need to get yourself back in the black and out of debt. So let’s just say you’re approved for American Express’s Velocity Escape balance transfer card. You transfer $3,000 worth of credit card debt onto the card and are charged a 1.00% balance transfer fee ($30 in this case). As this card comes with a 0% interest rate for 12 months, you now have $3,030 to pay back in just one year. To do so in time and without incurring any interest, you’ll have to make sure you pay back $252.50 each month and don’t make any new purchases on the card. But if you can only afford to pay $200 each month, then you’ll find yourself with an outstanding balance of $630 once the 12 months are up, which you’ll then be charged an annual interest rate of 20.74% on.
So before you apply for a balance transfer card, you might want to create a budget for yourself and figure out exactly how many interest free months you need for the whole plan to work.
3. Come up with a repayment plan
This step is pretty important, because with a balance transfer card you’re usually only required to pay back 2-3% of the debt each month. So going back to our example, that could be as low as $60 a month, which would get you nowhere near to paying off the full $3,030 in 12 months. This is why it’s crucial to a) know how much you need to pay back each month to clear the debt before the interest free period ends and b) know exactly how much you can actually afford to pay back each month.
4. Be aware of fees
Before you sign up for any new product, it’s always a good idea to make sure you’ve read all the fine print and know exactly what fees come with it. The majority of balance transfer cards come with an annual fee, so you might want to weigh up the cost of that against how much you’ll save in interest before putting your signature on the dotted line (or agreeing to the terms and conditions on your tablet, which is probably more likely).
ATM cash advances are another thing you might want to avoid. Not only do these usually come with a fee, but you’ll also be charged the purchase interest rate on any cash advances that you make and again, you usually won’t benefit from interest free days.
So now that you have all these neat tricks to make the most of a balance transfer card, why not check out Mozo’s balance transfer cards comparison page, to start figuring out which one might suit your financial situation best. Or if you just want a quick look, scroll down and have a read of the balance transfer offers below.
Finally, if you’re not totally convinced that you actually need a balance transfer card, why not make use of our credit card debt payments calculator to get an idea of how much interest you might wind up paying with your current credit card. This way you can compare it with a balance transfer card and see how much you could save in the long run.
*Average credit card interest rate taken from information in the Mozo database.