How does a balance transfer work?
In essence, a balance transfer allows you to pay less in interest, so you can pay down your credit card debt faster. Here’s how it works.
You transfer the balance from your existing credit cards onto a new balance transfer card. That transferred balance accrues interest at the card’s low balance transfer rate. As you are paying less in interest on your balance, you should be able to pay off more of what you owe, allowing you to clear your debt faster.
At the end of your card’s introductory period, any balance remaining will revert to your card’s purchase rate or cash advance rate.
How do you compare balance transfer offers?
When comparing balance transfers, take time to look at the following factors:
Balance Transfer Rate: This is the rate your transferred balance will attract, so the lower the better.
Introductory Period: This offer period will determine how long you have to pay down your transferred balance, so think about how long you will need to clear your debt.
Revert Rate: This is the rate your transferred balance will revert to if you don’t pay if off before the end of the introductory period. It will typically be the card’s purchase rate or cash advance rate.
Annual Fee: This is the fee you will pay to keep the card. If you’re only interested in using the card for its balance transfer offer rather than its features, try to opt for a card with as low an annual fee as possible.
Purchase Rate: If you plan on keeping the card after the balance transfer period, pay close attention to the purchase rate, especially if you carry a balance.
Features & Rewards: Any feature that encourages you to spend while you’re trying to pay off your balance transfer isn’t great. However, if you want to keep the card long-term, what the card offers in features and rewards may be important.
How do you make a balance transfer work for you?
Step 1: Start by creating a repayment schedule
Take your total transferred balance and divide it by the number of months in your introductory period. You now know how much you need to pay off each month. Set an automatic payment for that amount to ensure you pay off the entire amount before the introductory period ends.
Step 2. No new spending
There are several reasons why it’s a bad idea to spend on your card while you’re paying off a balance transfer. Let’s get into them.
When you use your card, you’re adding to your balance. That means you have to work even harder to pay down both your transferred balance and your new spending.
When you have a balance transfer, any new transactions attract interest from the day they are made. So, not only are you now working to pay down your transferred balance, you are working on paying down your new spending, plus the interest it’s accruing.
When you make a payment, your card provider determines how it will be allocated. Some providers allocate payments to the balance attracting the lowest interest rate first (such as ANZ), while others allocate payments to balance attracting the highest interest rate first (such as BNZ). When that’s the case, you may think each repayment is paying down your transferred balance, but it’s actually paying down your new spending. Unless your payments are large enough to cover your new spending plus your transferred balance, your intro period could end with your transferred balance much higher than you expected.
Step 3. If you want to avoid the temptation to spend on your old card, you may want to close the account
How do you apply for a balance transfer?
Once you’ve found the card and offer for you, check the small print to ensure you’re eligible. Then, simply apply online, providing details of the balance transfer within the application. Upon approval, your new card provider will arrange the balance transfer – then it’s up to you to start paying it down.
It’s worth noting that as a result of the coronavirus crisis, some card providers have pulled back on their intro offers, such as balance transfers. BNZ in particular states “balance transfers are currently unavailable until further notice”.