What is a balance transfer credit card? Is it a good idea?
A balance transfer card acts just the same as a normal credit card, but allows you to move your existing card debt from a card at a different bank. It offers a lower or interest rate on the transferred balance for an introductory period or for the life of the balance.
This means that you can save on interest and repay your debt faster than you would by keeping it on your existing card. If you have a card with a promotional interest period and are unable to repay your entire debt before this ends, you will be charged a higher interest rate for the remaining balance. This rate is usually the same as the standard purchase interest rate on the new card.
The low or 0.0% promotional interest rate usually runs for a fixed time period, usually between 6 and 24 months. Once this period is over, a higher standard rate will apply. Westpac is currently the only bank in New Zealand to offer a lower balance interest rate for the life of the transferred balance.
With most new cards you will need to pay an annual account fee. Annual fees typically range between $20-$390 depending on the perks and benefits of the card. There are some low-interest cards that don’t have an account fee and some cards waive the fee for the first year.
There are restrictions on how much debt you can transfer to your new card. Banks often state a minimum amount between $100 and $500, and you may only be able to transfer a percentage of the available credit limit on your new card such as 95%.
You can save hundreds of dollars in interest if you manage your payments well and pay off your balance during the low or no interest period.
Despite these conditions, a low or interest rate means you can save a lot when repaying your credit card debt.
Getting a credit card with a 0% or a very low-interest rate can be a good option if you will be able to pay off the card during the introductory period. If you think it will take longer than this, a personal loan is also worth considering.
If you don’t qualify for an interest-free balance transfer on a credit card or have multiple debts that are getting on top of you, a debt consolidation loan may help you save on interest with one repayment to worry about.
How much can you save with a balance transfer?
Exactly how much you will save will depend on the size of your debt, the length of the balance transfer offer and your repayments. You could save hundreds or even thousands of dollars in interest while you clear your debt. This is why it’s important to compare credit cards with balance transfer offers to see what the promotional rate is, how long it lasts and other fees that apply.
If the balance you are transferring is quite high and you don’t think you will be able to pay it off within a six month period, a card with a longer low interest rate will help you save.
Also factor in the annual account costs that a new credit card has. If a card has a higher fee but a low interest rate for the life of the balance or a period of two years, you will likely save more than a card with a lower account fee and shorter low or no interest period. However, work out a budget first to determine what will be the better scenario for you to get out of debt faster.
What to look out for
There are plenty of balance transfer card deals available in New Zealand, so how can you pick the right one? These are the crucial features you must compare when looking for maximum savings:
Balance transfer interest rate. This is the interest rate that will be charged on the balance transferred to your new card. The Co-operative Bank and ASB currently offer 0.0% for 6 months on their cards, while Kiwibank will charge 1.99% for 6 months. With the ANZ Low Rate Visa, the interest charged on your transferred balance is 1.99% p.a for 24 months. Westpac has a higher rate of 5.95% p.a., but this rate applies to the life of the balance rather than a promotional period.
Promotional period. The promotional period refers to how long the low-interest rate applies. Depending on the card, this could range from 6 to 24 months, or for the life of the balance. The longer the promotional period, the more time you have to clear your debt and save on interest.
Standard interest rate. After the promotional period ends, the remaining debt will be charged interest at the higher standard interest rate. This typically ranges from 9.95% to 20.95% p.a. – but please be aware that rates can vary depending on the type of card. If you don’t think you can repay your entire debt before the promotional period ends, you should look for a card with a lower standard rate to minimise your interest costs, or opt for a card that has one interest rate for the life of the balance.
Annual fee. Most cards charge an annual fee, starting from when the account is opened. Some credit card issuers waive this for the first year. The annual fee is treated as a purchase and incurs the same interest rate as other purchases you make with the card. Cards with higher annual fees come with more benefits, but if you are looking to save and pay off your debt, it may make more sense to stick with the lowest fees possible.
Interest-free purchase period. Some credit cards come with an interest-free period of up to 55 days for purchases. However, there are usually conditions such as having no balance transfers and paying your previous statement closing balance in full. While this feature won’t be of benefit as you are paying off your debt, you may be able to take advantage of it in the future.
Other benefits: Cards may offer additional benefits such as the ability to earn rewards or free travel insurance for travel booked on the card. These may help you reach a conclusion but shouldn’t be the deciding factor when comparing balance transfer credit cards. Often these kinds of benefits are available on cards with higher interest rates and account fees, rather than low-interest cards.
How to start your balance transfer
You can start an application on the website of your preferred bank or card issuer, and you’ll usually need to request a balance transfer at the same time. Generally, there is a section on the application that asks if you would like to transfer existing debt to the new account.
You will need to include the details of your existing credit card debt on the application – including the account number, the issuer’s clearing code (BSB) and how much you want to transfer. If you are successful, your debt will be automatically moved over to your new account after you have activated the new card.
Do I have to contact my old bank and new bank to make the switch?
Your new card issuer manages the balance transfer process after both your card and the balance transfer are approved. You just need to provide details of your existing card when you apply.
If you want to close your old card, you need to do that yourself by contacting your bank. If you don’t close your old account, you may still be stuck with annual fees and other maintenance costs that come with your existing account.
Why might your application be refused?
Financial institutions assess balance transfer applications carefully. To increase your chances of approval, here are some factors that may cause a bank to decline your application :
Poor credit history. You will need a good credit history to obtain a balance transfer card. If you haven’t checked your credit history in a while, you can check your own credit report for free. However, if you have a poor credit history due to missed payments, defaults on your account or significant levels of debt, you might need to repay more of your debt and demonstrate your ability to make regular repayments before you apply.
Submitting multiple applications too rapidly. Each application you make for a balance transfer is recorded in your credit history. If your application is refused, don’t just apply to a different credit card issuer straight away. Instead, take some time to repay your debt, carefully compare other card options and ensure you tick off the eligibility criteria before you apply. Follow the steps in our guide on what to do if your application has been refused to increase your chances of approval when you next apply.
Cards in a different name. Your new balance transfer card must be in the same name as your current card. If you apply with a different name, such as your partner’s name, you will be turned down. If you need a card with multiple account holders, check with your new bank about a joint account or add additional cardholders.
Used intelligently, a balance transfer card will reduce your interest payments and get you out of credit card debt faster. Used the wrong way, your debts can actually become larger.
Ensure you don’t get trapped in balance transfer debt by avoiding these mistakes:
Even if there is a promotional period with low or 0.0% interest, you still have to make at least the minimum payment each month. You can’t simply apply for the balance transfer and then stop making payments on your debt. The minimum repayment is usually stated as between 2% to 5% of the outstanding balance, or $5 to $25, whichever is greater.
Once your balance transfer promotion finishes, you will be paying the standard interest rate on the remaining balance. When you compare credit cards with balance transfer promotions, aim to choose a card with a standard purchase rate that is lower than your current credit card rate. Alternatively, make sure you repay the entire debt before the standard rate kicks in.
Unless you have other more expensive debts that you are trying to pay off, you should prioritise your balance transfer debt to get it paid off before the end of your low or no interest period.
If you are only paying the minimum repayment each month, you won’t be able to repay the entire balance by the time the balance transfer offer ends. Then your debt will start to collect interest and grow again. Instead, you should calculate exactly how much you need to pay each month to repay the entire balance by the time the interest-free period ends. You can do this by dividing the size of your debt by the number of months in the balance transfer offer. This will give you a goal repayment to meet every statement period to clear the debt before the promotion ends.
The key lesson? Budget as much as you can towards paying off your credit card debt while the promotional rate applies. If you haven’t paid everything off, it is possible to apply for another balance transfer.
Adding new debt will slow down your ability to repay your card. Don’t buy anything new on your credit card that you can’t immediately pay off in full. Banks are required to allocate repayments to whichever debt is accruing the highest interest on your account. So, if your balance accrues interest and your purchases collect the standard interest rate, your repayments will go to the purchases rather than your balance transfer. Even if your card has a rate on new purchases, you should concentrate on repaying your debt rather than making more purchases.
It is tempting to hang on to your old card “just in case”. Realistically, if you have run up debt on it before, you are likely to do so again. Cancel the card, cut it up and concentrate on paying off the balance.
Remember to transfer any regular payments and check with your bank if there is any outstanding fees or interest charges before you forget about it completely.
The majority of cards have a higher interest rate for cash advances, so you could be paying more than 22% p.a. or even as high as 27.95% p.a if you take cash out. Cash advances are not subject to interest free periods so you’ll be paying interest on that amount straight away.
What’s in it for your new credit card issuer?
Credit card issuers make money when you pay interest, so why would they charge when they could charge 20% or more? Here’s why:
You’ll eventually revert to a higher rate. If you don’t pay off your entire debt during the promotional period, you end up collecting interest at the standard rate for your card. This can range between 9.95% and 20.95%. Once that happens, your new credit card issuer can potentially make hundreds or even thousands of dollars from you in interest charges.
Persuading you to switch is tough. Kiwis tend to stick with the bank where they first open an account and are reluctant to switch banks, and it is often expensive for banks to acquire new customers. Offering a discounted interest rate is one of the cheapest ways for banks to attract potential customers. It is essentially a cheap form of marketing.
You’ll still have to pay interest on new purchases. While you may enjoy interest on your balance transfer debt, the standard interest rate for purchases usually applies to any new purchases you make while you are paying off that debt. This is because most credit cards don’t offer interest-free days on purchases if you are carrying a balance. Adding new charges to your card could make it harder to save on interest and pay off your debt before the introductory period ends.
This is usually possible if you and your partner/spouse are already using a joint-account credit card. Read our full guide and find out which banks allow this type of balance transfer. However, you usually can’t transfer a debt that is in someone else’s name to a new account that is under your name.
While most balance transfer deals are for credit card debt, some credit card issuers will let you transfer debt from a store card as well.
No. Existing customers are ineligible to apply for another balance transfer offer with their existing bank.
Yes. There is nothing stopping you from applying for a card from a different bank to transfer your remaining balance once the low or no interest period ends. This could effectively mean that you are paying very little interest until the entire balance is paid off. However, do keep in mind that multiple credit applications can affect your credit report, and you also run the risk of having more accessible credit that can be tempting to use if not managed well.
No, you can only transfer balances from credit cards issued in New Zealand.
While you could be approved for your credit card within 48 hours, it may take between 1 to 2 weeks for your old balance to appear in the new account. The balance transfer offer applies as soon as your card is approved rather than when your balance is in your account.
Using a balance transfer card
Most credit cards offer a set period of interest-free days as a standard feature of the card. You can usually only take advantage of interest-free days when you have paid your balance in full. So, if you are still repaying the balance transfer, you won’t receive the interest-free days that usually apply to purchases.
You should make repayments by the due date detailed on your bank statement for each statement period. While you are only required to pay the minimum repayment, you should always aim to pay more to clear your debt faster. This is especially important when you are using a balance transfer offer that will only apply for a promotional period. To avoid paying interest on your debt, calculate how much you need to pay each month by dividing the size of your debt by the length in months of the promotional period. This will give you the amount you should aim to repay each month to clear your balance before the promotion ends.
Yes, you can repay your balance as early as you like. In fact, it is wise to clear your debt as fast as possible to avoid revert rates and any additional interest costs. Unlike a fixed schedule personal loan or home loan, there are no penalties for clearing your credit card debt ahead of time.
Banks allocate your repayments to the highest rate of interest first. This means that with a low-interest-rate balance transfer promotion, repayments will usually go towards purchases and cash advances first. As a result, try not to make other purchases while repaying a balance transfer so all your repayments are dedicated to clearing your debt.
Sally McMullen is Finder's credit cards and frequent flyer editor by day and a music maven by night. She's also one half of the Pocket Money podcast. Her byline can be spotted on Yahoo Finance, Dynamic Business, Financy and Mamamia as well as Music Feeds and Rolling Stone. Sally has a first-class Honours degree in Communications and Media Studies (majoring in Journalism and Professional Writing) from the University of Wollongong.
A balance transfer can be an enticing option to help you save money and get rid of credit card debts. However, there are some factors which should be considered before making balance transfers, as this could potentially affect your credit rating.
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