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Credit Card Balance Transfers - maximising the benefits
As competition in the Australian credit card market intensifies, we have seen more credit card issuers introduce “low introductory” interest rate periods as a means of acquiring new customers. Many of these promotional deals are offering 0% for an introductory 6 month period, or a rate around the 6% mark for the life of the balance transfer.
How to maximize your benefit associated with low balance transfer offers:
1. Don’t use the new card: Balance transfer amounts transferred over onto your new card are actually paid off first. For example: if you transfer $5000 onto your new card at the introductory rate of 0% and you then make purchases in the month of $500, your new balance will be $5,500.
If you then make a payment of $500 , this $500 will go off the balance transfer amounts and not the new purchases. So your new outstanding balance amounts will be:
- $4500 – at 0%
- $500 – at (assume) 12%.
Suppose the next month you make purchased of $2000 and then pay this amount off. Your new balance will be:
- $2500 – at 0% - $2500 – at (assume) 12%.
As you can see, by using your credit card during your introductory balance transfer period you are actually not maximizing the potential benefit of the introductory period.
2. Cancel up your old card: Don’t fall into the trap of keeping your old credit card. As soon as you have received the new card you should cancel the old one. If you don’t, then you can quickly find that your credit card debt has quite quickly increased.
3. Pay off the balance in the introductory period: Once the introductory balance transfer period has ceased any outstanding balance transferred amounts will revert to the “Cash Advance”, which in many cases is higher than the “purchase” interest rate on the card.
4. Watch our for the revert rate: Make sure you understand what rate any existing into balance transferred amounts revert to att he end of the intro period. Some cards revert to the cash advance rate while others revert to the purchases interest rate
The low balance credit cards offers if used correctly can be an effective way to reduce interest rate charges in the short term, but you also need to take into consideration if the credit card is best for your needs in the longer term. Don’t forget to look at the ongoing interest rate for both purchases and cash advances. Compare Now!
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