Time to read : 5 Minutes
Aussies are ditching credit cards at a rapid rate, but for those that do still have them they’re also individually carrying over higher balances than for a long while.
And the thing is – as counter intuitive as it sounds, a new credit card is just the thing that could clear your old debt… the cheapest.
(Then, if you choose you could ditch them altogether.)
Let’s take it step-by-step.
What is a 0 percent balance transfer credit card?
Aussies cut up their credit cards to the ‘tune’ of 25,481 in July, according to the latest RBA Credit Card Statistics.
This is the largest drop so far this year. What’s more, the number of personal credit card accounts has plunged by more than 180,000 accounts over a year.
As big as that sounds, it’s only 2 percent. And here’s the thing: you can’t close a credit card that has an outstanding balance… not without somehow repaying it first.
So if you do want to ditch your credit card for good – and get your debt under control – you might want to consider the balance transfer credit card.
While it can sound counter intuitive to solve your credit card woes with another credit card, hear me out. A 0 balance transfer credit card lets you do exactly what the name implies; transfer an existing balance you have with an institution, to a new one. The idea is to lure you across with that no or low interest deal. It’s a blatant bid for your business but one that, used smartly, represents a brilliant opportunity for ultimate credit card freedom. However, the opportunities to take out these cards are shrinking so you need to act quickly to put the strategy in place. While two years ago there were 34 months available at no interest from multiple institutions, today the longest period you can get is 26 months.
Here’s the process you need to undertake. Pronto.
Step one: Sign up to the best 0 percent balance-transfer deal
Sign up, simply transfer your balance… then set about clearing it forever within that balance transfer, preferential interest rate period. That’s the key to clearing your card.
To be clear you are not paying a cent in interest for this amount of time so when you do make a repayment, every single cent comes off your outstanding balance, rather than going to your credit card provider in interest as high as 18 percent. The simple mathematical process is taking your balance and dividing it by the number of interest-free months. The more difficult part is ensuring that you are confident you can find that amount of money every month to make those repayments.
Step two: Optional… ideally
Hopefully you don’t need to execute step two. Hopefully you can generate enough surplus income to discharge your debt at no extra interest =, within your balance transfer period. However, if you can’t, this step is for you. The sting in the tail of balance-transfer credit cards is that any remaining debt at the end of the interest-free period will attract a punitive interest rate. Forget 18 percent – it’s more likely to be 20 percent-plus. So if you have remaining debt at the end of your preferential interest period, you need to get out of that product. At this point, you could take up a second 0 percent balance transfer deal… if there's still one available, which is not a given as the market seems to be rapidly shrinking in both time available and products on offer. But switching your debt to a second balance transfer credit card and then repeating step one is the smart thing to do. Hopefully, with a chunk already paid off, a second balance transfer should get you over the line to a clear credit card. If you're not likely to clear the balance in the interest-free timeframe, you'll need to be aware of another trap: One of the ways that credit card providers make these seemingly too-good-to-be-true offers worth their while, is to charge you a similarly punishing interest rate on new purchases.
So don’t make any. (Read that again.)
This is not the credit card that you use for your living expenses. Besides, you are trying to get out of credit card debt. Your day-to-day costs and consumption needs to come from another account. Preferably one that is a debit rather than a credit account.
Be aware: A 0 interest balance transfer card is not always completely 'interest-free.' Here’s what to look out for:
Annual fee: Some cards charge an annual fee, which can range from around $50 to $150 a year. This fee can eat into your interest savings if you don’t factor it in.
Balance transfer fee: This is a one-off fee (often 1–3% of the balance amount you're transferring) that the card provider charges for moving your balance over. For example, transferring $5,000 with a 2% fee would cost you $100.
Revert rate: When your 0% interest period ends, your card’s interest rate jumps back to its standard purchase or cash advance rate (see Step two, above).
While a balance transfer card can be a smart way to clear that debt, it pays to read over all your fine print before applying – not just get excited by the shiny “0% interest” headline.
The bottom line
The final factor to be aware of is that our now US-style credit score system is so-called ‘positive’. In technical terms that means it factors in a bunch of money moves it didn’t previously, including how many times you apply for credit.
Which, for you, could be negative indeed.
Each time you apply for any form of credit, it slightly suppresses your score.
And if your report paints a picture of a serial credit-card revolver – transferring and transferring your debt – that won’t be good for you at all.
So don’t keep executing the balance transfer strategy… I don’t think it will remain an opportunity for long anyway.
But do use a 0 percent balance transfer smartly.
You need to be disciplined. You need to know the above. And then you need to move heaven and earth to generate the extra cash to seize this opportunity to take back control of your credit at no (or minimal) additional cost.
