A credit card balance transfer is when you apply for a credit card with a different bank to the one you are currently using. To reward you for giving them your credit card balance, the new bank offers you a lowered interest rate on the transferred debt.
At present there are some tempting credit card balance transfers available from the major New Zealand banks.
Westpac is offering 0% per annum for 12 months
ANZ is offering 0% per annum for 12 months
Kiwibank is offering 1.99% per annum for 6 months
BNZ is offering 1.00% per annum for 12 months on transfers, and 0% for 6 months on purchases on the card. They expect you to shift your main banking to them to receive the deal. I also don’t like the idea of encouraging you to use the card. 6 months will go very quickly and you’ll be no better off – or perhaps even worse off if you put purchases on the card – than when you transferred the balance to them!
Should you transfer your balance? If so, which bank and term should you choose?
If you are struggling to pay off your credit card debt and the rate is around 19.95% per annum, it does make sense to see if you can transfer this debt to a lower interest rate.
When considering which card to transfer to, you need to consider all the conditions attached to the offer – not just the interest rate.
BNZ’s offer does appear to have the most conditions, but do check the conditions of any bank’s offer as they are not doing this to help you. Remember that the bank is not your friend! The banks are offering these transfers to hopefully grow their asset base (your debt) and their income (your interest payments in perpetuity).
I’m a big fan of balance transfers when used wisely. If you are clever, they are a great way to reduce the interest on outstanding debt.
There are, however, a number of things to be aware of:
- Make sure you read the terms and conditions!
- Check the annual fee for the credit card you are transferring to.
- Consider the time period. Is the transfer term going to be long enough for you to pay off the balance? Once your 6, 9, or 12 months are up, the interest rate reverts to the standard rate (usually around 19.95% per annum, or around 12.95% for a low interest card). You could opt for a “life of the balance” offer which might be at a higher interest rate, but allow you longer to pay off the balance.
- Don’t count on being able to continually transfer your balances between banks. If you intend to do this, you’ll need to be really disciplined and leave your previous card with enough available limit to transfer back to. Don’t be tempted to max it out again. As your total credit card limits increase, your ability to get a new card to transfer to will decrease.
- If you have transferred a personal loan to a credit card (some banks allow this), the minimum monthly payment may be more than you’re currently paying for the loan. This is because a credit card’s minimum payment is around 2% of the total balance owing. Your personal loan would have been spread out over a longer term (perhaps 5 years) to lower your payments. Check that you can afford a monthly payment of around 2% of the credit card limit before you apply for the card!
- Don’t use the card for purchases after you have transferred your balance. Payments made to the card will be applied to the transferred balance, rather than your purchase. Your purchases will be at the standard credit card interest rate of around 19.95% per annum and will stay on the card accruing interest until you have paid off your transferred balance. Lower the limit on your old card and use that for limited purchases. I recommend cutting up the card with the transferred balance on it. For this reason, I am not in favour of any transfer offer that requires use of the card.
Even if you are totally maxed out, it could be worth seeing if you can shift some of your high interest debt to a low interest balance transfer. Then focus on paying down your remaining high interest debt, whilst only making the minimum monthly payments on the transferred balance.
Have you ever transferred your credit card balance? How much money did it save you? Were you disciplined, or did it just enable you to reuse your old card?