Credit Cards: Avoid the balance transfer blues
Splurging, shouting, retail therapy, flashing the plastic ... whatever you like to call it, racking up credit card debt is the fun part. Opening your next statement, however, can be quite a different story. Once your eyes scan the Balance Owing column, you're in the danger zone, a prime candidate for post-spending depression. This condition is characterized by an involuntary cry of "That can't be right", followed by a panic-driven search for receipts. Too late. The damage has been done. But what to do about it? In a light-bulb moment, you remember the words 'zero balance transfer' and all of a sudden a light illuminates at the end of the debt tunnel.
RateCity data shows that there are 13 cards with 0% balance transfer offers and more than 150 cards with balance transfer rates less of than 5% over periods from 4 months to the life of the balance. For the stressed-out owner of a maxed-out credit card, this could be just the ticket to paying off debt. Before you start on the balance-transfer roundabout, however, stop and think about what can go wrong after the euphoria dies down.
Trap 1: Resist temptation to transact
It's as obvious as the credit card in your wallet but to gain the absolute maximum advantage of a low balance transfer offer, don't transact on the card until that outstanding balance has been paid off. Why? Any repayment you make will come off the original outstanding balance and not the new one. For instance, if you transfer a balance of $5,000 from your old card to a new 0% balance transfer card and then spend a further $500 on the new card, any repayment you make will always go towards paying off the lower interest balance first. To avoid paying interest on the $500, you would have to pay the full $5,500. Worse still, if it takes you 8 months to pay off the $5,000, you will be up for an additional 8 months worth of interest on $500.
Trap 2: Honeymoon doesn't last forever
Before you start looking at balance transfer offers through rose-coloured glasses, delve a little deeper to discover what the interest rate reverts to after the zero or low interest offer finishes. RateCity data shows that 8 cards will revert from 0% to a rate as high as 6.75% above the headline rate so don't be caught out.
Trap 3: Change partners, risk rejection
Switching from credit card to credit card to take advantage of balance transfer offers seems a clever idea in theory. Most people forget that each time they apply for a new credit card, it is recorded on their official credit file. Applying for loans regularly can reflect badly on an individual's credit history because this behaviour is interpreted by financial institutions as potential rejections by other credit providers. RateCity explains this in detail on Your Credit File.
The last word
Aim to pay off your credit card debt before the introductory period ends. If you simply can't resist the temptation to spend more on the card, it may be time for you to review your whole financial situation. Perhaps you need the discipline of a personal loan to pay off debt instead of adding to it. Read our article on Personal Loans vs Credit Cards and you may decide on new tactics for debt control without the balance transfer blues.
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