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Credit Card balance transfers are very popular in Australia at the moment. Deals of 0% interest charge for 6 months and no annual fee are common. You can take an existing credit card balance, which you may be paying interest on and pay it out with a balance transfer at 0% for 6 months. But are they a good deal?The Cons
- Here’s the obvious one. When the party is over 6 months later, you may end up in a worse position than you are now: still owing the same balance but at a higher interest rate.
- Balances on credit cards are repaid in a specific order, determined by the rules set by the financial institution. I’ll bet that in all cases (certainly in all cases I’ve seen), the lower interest rate amounts are paid out first. (See this fine print for an example – Payments made to your … Credit Card are first applied to any amounts transferred from other cards, before they are applied to any other cash advance or purchase amount. This means that the portion of your outstanding account balance that’s subject to a lower interest rate will be paid off first.). This scenario can play out in two ways.
- After performing the balance transfer you accrue purchases on your card. On the next bill you will need to pay out your balance transfer in full before you can start to pay off those charges. The alternative is to incur interest charges on the purchases.
- Conversely, if you are transferring to a card that already has purchases you will be in the same boat. It’s not the date of the transactions that matter. The bank will pay out the balances that are less valuable to themselves first.
- Interest free for 6 months does not mean nothing to pay for 6 months. You will still need to meet the minimum payment amount for each bill, or face penalties for late payment.
Is it worth it?
If you reckon you can trust yourself with a burning hot credit card in your skyrocket then you might want to consider snapping these goodies up whenever they appear. The best plan is to keep one card for day to day transactions. This card should be the one with the longest interest-free period, not necessarily the lowest interest rate. The interest rate doesn’t matter as you should always pay it off in full each billing period. If you can’t do that then you are living outside your means. All of the other cards, the ones you take balance transfers from, are just vehicles for what is effectively 6-month interest free loans.What’s the risk?
The risk is the burgeoning accrual of debt. These will all need to be repaid. If you want to avoid any charges they’ll need to be repaid in lump-sums. The time-frame is quite short, so if you went off and bought investments with the borrowed funds you’d need to be doubly-sure you could exit in a timely manner and at a position of your choosing.
What’s your experience with credit cards? Pop in a comment and share your thoughts.