How does a balance transfer work?

If you’ve been wondering about balance transfers and whether one would work for you, find out more about it all in this, your guide to zero balance transfers.

What does balance transfer mean?

Making a credit card balance transfer means that you move your existing credit card debt (or balance) to a new card that has a lower rate of interest – very often a zero rate of interest.

This lower rate lets you repay your debt much faster as not as much – or none – of your monthly repayment is going on interest; it’s all coming off the principal.

This is a brilliant solution for anyone wanting to significantly reduce or clear a balance in a short period of time. However, the low or no interest period doesn’t last forever; most balance transfer cards offer a promotional period that lasts from six to 36 months, with most averaging around 12 to 18 months. Once this period ends, any balance left on the card will be subject to the revert rate, which can sometimes be higher than the rate your existing card is on.

More about how balance transfer cards work

As well as moving one balance onto a new card, you can also consolidate several debts onto one card. This works well because you’ll only have one payment to make each month and the balance is set at a very preferential interest rate. Just having a year or so in which all of your repayments attack the principal can make a serious dent in your debts and if you’re really committed, you could clear them altogether before they attract the revert rate.

Let’s look at some of the features and benefits of a balance transfer card

Your introductory period

Your introductory period, which will most likely be zero per cent interest, will generally last for 12 to 18 months, although some are as short as six months. It’s important to find out how long this period is when you compare credit cards as you need long enough to really hack away at your balance. You also need to remember that the introductory period starts as soon as the card is activated, not when you make your first purchase or your first repayment.

Your revert rate

When your introductory period ends, your interest rate will revert to the card’s usual rate or even the higher cash advance rate. Pay close attention to the revert rate, because you could undo some or all of your good work if your remaining balance is attracting a high level of interest. You need to aim to pay off all (or at least nearly all) of your balance before it reverts.

Your balance transfer fees

When you make a balance transfer, you might have to pay a one–off balance transfer fee, usually between one per cent and three per cent of the existing balance. This fee usually goes to the original provider.

Is a balance transfer the same thing as a money transfer?

No, it’s not. A balance transfer is when you transfer a credit card balance – a debt – from your existing card to a new one. A money transfer is when you send money from one account to another.

Can you save interest when you make a balance transfer?

Yes, you can, if you take the time to find the best one for you. You should look at Infochoice’s credit card calculator to narrow down your options. Look at the interest rate your current card is on and compare it to the BT cards on offer, how long their introductory periods are and what the revert rates are.

The Commonwealth Bank, for example, has a Low Rate credit card that offers balance transfers at 5.99 per cent interest rate for five months. You might think this isn’t a great deal, but the revert rate is just 13.24 per cent

Most American Express balance transfers revert from zero per cent to 20.74 per cent after 12 months. If you’re not sure you’ll clear your balance within a year or so, you’re safer with the Commonwealth Bank option.

Do you have to close your “old” card off?

No, but if you’re paying an annual or maintenance fee for your older card, then you might want to close it down so that the money can go to reducing your new balance. If you decide to close the older card down, contact the provider to make sure there are no outstanding fees or commitments on it. There may also be some rewards, such as Virgin or Qantas Frequent Flyer points, that you could use or transfer, on it too.

How long does it take to make a balance transfer?

Once you’ve decided which is the ideal card for you, then filing out the application for the balance transfer will take around 15 minutes. You should find out pretty quickly if you’re approved and then it’ll take a few days for the balance to be moved to the new card.

Do you still have to pay the minimum amount every month?

Yes, you still have to make the minimum repayments – or the whole deal could be off and the card could start charging you interest.

How to make your balance transfer work for you

In order to make a balance transfer really work for you, you need to find a card that’ll let you clear most (or hopefully all) of your balance before the revert rate kicks in.

For example, the Westpac Low Rate credit card, has a purchase interest rate currently set at 13.74 per cent on purchases.

If you choose this product as your balance transfer card then you’ll get 16 months of zero interest. If you’re moving a balance of $4,000 to this card, then you’ll need to pay $250 in each month to clear this balance.

Paying just the minimum monthly payment (two per cent of the balance) of $80 during this interest–free period means you’ll only pay off $1,280. This in turn means that the remaining $2,720 will attract an interest rate of 21.49 per cent once the introductory period ends. Balance transfers tend to revert to higher–than–usual interest rates, so always do the maths to make sure you won’t be left struggling after you revert.

Compare credit card balance transfer deals and offers from Australia’s major banks, credit unions and other credit card issuers at InfoChoice.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.