Nobody likes paying more in interest charges than they have to, but it can easily happen. Depending on the number of interest-free days you have to pay off your existing credit card and your ability to pay the balance owing on the card, you may be better off with a zero or low-rate balance transfer card.
While there might be a time lag for approval at this time, making the decision earlier rather than later could save you hundreds of dollars in charges in the next 12 months.
Financial product comparison website RateCity.com.au did some number crunching to compare what would happen if you clocked up $5000 on your credit card – and then transferred it to one of its top low-rate cards rather than paying off the balance on your credit card.
Save hundreds of dollars
Based on monthly repayments of $400, after 12 months the average credit card would cost an extra $459 in interest compared with taking the cheapest balance transfer credit card.
The total cost for the average card after 12 months including interest and annual fee on a $5000 balance would be $553, according to RateCity.
By contrast total cost of the ANZ Low Rate credit card would be $49, followed by $212 on the Catalyst Mutual Platinum Mastercard and the Community CPS Australia Platinum Mastercard.
The cards were ranked according to the lowest balance transfer rate, the longest balance transfer period, then annual fee and purchase rate.
RateCity spokesperson Michelle Hutchison says it is not unusual to find balance transfer cards with zero interest for up to nine months.
Where the cards can differ markedly is the purchase and reversion rates as well as annual fees (the reversion rate is the interest rate charged on any outstanding balance at the end of the balance transfer period).
“It is definitely best to only use the cards for the balance transfer deal. If you need to put more on credit, look for a low-rate card and pay it off as quickly as possible. Always the focus should be on getting rid of debt,” says Hutchison.
How it works is you apply to a new provider for a new credit card with a special introductory interest rate of zero per cent interest for balance transfers. After approval, you transfer the balance of your credit card.
A sudden halt
The minimum repayment amount is typically 3 to 4 per cent of the balance. Failure to pay at least the minimum payment on time could result in an immediate end to the introductory period. Taking advantage of the automatic debit system may ensure there are no late payments.
Initiating a balance transfer will mean paying either a balance transfer fee or an annual fee on the card itself. But as the figures show, even with these fees, the potential savings from a balance transfer can be worthwhile.
Hutchison says that a welcome addition introduced by banking reforms was that credit card statements have to show how long it would take to pay off the debt if only the monthly minimum was paid, which tends to spur people on to make repayments more quickly.
Another welcome reform was that repayments made to a credit card are allocated to the amount on the card being charged the highest interest, which also helps people repay their debt sooner, says Creditcardfinder.com.au publisher Jeremy Cabral.
“If you had a balance transfer card that reverts to the high cash advance rate, then any repayments that are made will repay that first,” he says.
Cabral says that big spenders who know they will be able to repay the amounts owing early in the new year can take advantage of the zero interest period on cards in two ways.
Do any initial spending up to the limit on the card on a low-rate card and then transfer the balance to a zero rate card. Any further purchases should be on the initial low-rate card.
If you have to get a cash advance on a credit card, then repay that as quickly as possible because often the interest rate is higher – about 20 per cent compared with the standard variable credit card rate of 13.5 per cent.
Cash advances are excluded from any interest-free period and interest kicks in from day one. Cabral says it is still unusual for consumers to shop around for credit cards.
“Credit cards account for a quarter of transactions with a value above $25, so the decision as to which card the consumer uses has a strong impact on how much is paid in interest.
“The concept of shopping for the best interest rates is not new for homes and cars, yet so few consumers stop to think about shopping around for the best credit card deal,” he says.