You’ve conducted your balance transfer, but what now? Here are some tips on how you can manage your new credit card and consolidate your debt
Balance transfer credit cards can be an efficient way to free yourself from high interest to start consolidating your debt. Conducting a balance transfer is a simple process, but repaying your debt before the promotional offer runs out can be the tricky part. If you’ve just conducted a balance transfer, here are a few tips to follow to ensure that your consolidation goes successfully and smoothly.
Pay attention to the details of the promotional offer
There are a few key details of the offer that you should pay attention to after you’ve conducted your balance transfer:
- Offer length. Balance transfer offers generally sit between 6 and 24 months. Once your card has been approved, the balance transfer promotional period begins. The sooner you begin repaying your balance, the longer you’ll have to take advantage of the low interest offer. Set phone and calendar reminders to prompt you to make regular repayments and to flag how long you have left.
- Promotional rate. Most Australian providers offer cardholders 0% balance transfer offers, but if it does charge a low interest rate, it’s important to understand how much your balance will grow each month and how you’ll need to factor this into your repayments. Creating a payment plan will help simplify the process and reduce your chances of failing to repay your entire debt by the end of the promotional period.
- Revert rate. Like all good things, the low promotional rate on your balance transfer doesn’t last forever. Once the promotional offer ends, the revert rate will kick in and start collecting interest on your remaining debt. The revert rate is generally the much-higher standard cash advance or interest rate. To avoid growing your debt with interest once the offer expires, make regular repayments, don’t use your card for purchases and keep an eye on when the offer ends to ensure you don’t have a remaining debt at that point.
- Minimum repayment. You may have a 0% interest rate, but you’ll still need to make minimum repayments each month. How much you’ll have to pay will vary from card to card, but this amount rarely allows cardholders to repay their entire debt by the time the promotional offer ends. If you want to avoid collecting high interest once the promotion expires, you should aim to pay more than the minimum amount each statement period.
- Work with a budget. Consider the size of your debt, the length of the promotion and the interest rate to calculate how much you’ll have to pay each month to ensure that your entire debt is repaid by the end of the offer. If not, your remaining balance will begin collecting the higher revert rate and you could get stuck in the debt trap once again.
Decide what to do with your old cards
Opening a balance transfer credit card doesn’t automatically close your old cards. Though you may not want to cancel them just yet, as it may have an impact on your credit score. Both your credit utilization rate and the age of your card can positively or negatively affect your credit rating.
- Credit utilization rate. This is your debt-to-limit ratio – if you have a $1,000 limit and a balance of $800, you have a rate of 80%. There are no hard and fast rules for how long you should try to keep your rate, but many money experts recommend that you should shoot for under 30% as a goal. As you can see, if you transfer one or several balances to your new card and use most or all of your limit, your credit score may take a hit.
- Age of card. Credit bureaus like to see that you have had a long relationship with your credit card. The older your card, the better.
- Annual fee. On the other hand, if your old cards have an annual fee and you do not plan on using them any longer, you may want to consider closing them if you do not want to keep paying the fee every year.
Don’t use your balance transfer credit card for purchases
- Repayment hierarchy. The sole purpose of getting a balance transfer is to consolidate your debt. Using your balance transfer card for purchases completely contradicts your debt consolidation aim. Balance transfer credit cards often charge high interest on purchases and depending on their terms and conditions, your repayments could automatically go to whichever debt is collecting the least interest. So if you use your card for purchases, your payments will go towards your balance transfer debt, while the balance for your purchases accrues interest.
- Interest-free days. Interest-free days are only active if you’re not carrying a balance at the end of the statement period, so you won’t be able to cut interest costs that way.
- Emergency purchases. If you want a card for emergency purchases, you might want to consider applying for a different card with a low interest rate on purchases and do your best to keep the other card for consolidating only.
Visualizing payment hierarchy
After the offer ends
If you’ve found yourself with a remaining debt at the end of your promotional period, you might want to consider doing a second balance transfer. However, if your credit history shows that you were unable to repay your debt during the promotional period, this may means lenders are less likely to approve your application. Applying for too many credit cards and rejected applications can have a negative impact on your credit file, so this is also something important to consider if you’re considering using a second balance transfer as a back up.
Balance transfer credit cards can be a worthwhile consolidation tool, but only when used properly. Plan your strategy, make regular repayments and follow the above simple tips to ensure you get the most out of your balance transfer.