If you have a credit card balance that’s out of control and only getting worse as time passes, a balance transfer to a different credit provider is a leg up – not a cure-all – for wiping the debt out. Many people believe transferring the balance to another card will fix the problem. It doesn’t happen in isolation, but you can make the most of your credit card balance transfer by following a few simple rules.
How much does a balance transfer cost?
Many people assume that balance transfers are free of charge. Some of them are, as a way to entice you over to an new credit card provider. However, many charge a balance transfer fee, which can add to your outstanding balance. Watch out for large fees, as it may make matters worse, making your goal harder to reach. On average, these fees range between 1-3% on the total balance.
Introductory rate perks and pitfalls
The main reason anyone transfers a balance is to take advantage of the introductory interest rate. Some people assume these rates are either:
- Zero, or;
- Last forever;
- A combination of the two!
Unfortunately, a “honeymoon” period of a zero or near-enough balance transfer interest rate will expire eventually. Typically, they expire after 12-18 months. Then, the true interest rate kicks in. This hovers around 17%p.a to 22%p.a.
Let’s say you owe $5,000. If you contribute $280 per month to the balance, you can pay it back within the introductory period of 18 months.
Paying off the debt with a maximum balance transfer rate of about 7.9%p.a., you can pay that same debt within the same amount of time by paying back $299 a month. That way, you save $1,883 in interest compared to paying back the minimum amount.
If you owe $5,000 with an 18%p.a. interest rate and ONLY pay the minimum amount, you would pay off the debt in 33 years, totalling $17,181. If you paid $250 a month, you would incur $878 in interest over two years.
Once you have it…don’t use it!
The above figures are only useful if you STOP destructive spending habits that put you in debt in the first place. You should examine your spending and curb as much unnecessary expenditure as possible. When you transfer your balance, don’t spend more on your card, and remember to cancel your other cards: your bank may still charge you an annual fee.
You should always compare different balance transfer credit cards to see which one is right for you. Still stuck? Ask advice from a financial professional.