Australians traditionally love their credit cards. Collectively, we are currently paying interest on almost $35 billion of credit card debt (Canstar), however that doesn’t stop the banks from pursuing new business by tempting consumers with an array of ‘zero per cent’ balance transfer offers.
Balance transfers allow customers to shift their existing credit card balance to a rival and not pay any interest on that amount for a limited period.
Interest rate comparison website Canstar says there are a record 97 balance transfer offers being promoted, up from 56 two years ago, with most offering interest free periods of at least 12 months.
If you’ve got a sizeable credit card debt, these can look appealing, however before being tempted by the prospect of paying no interest for a year or more, consumers should be aware of a few big traps.
What should I look out for?
Historically, big banks will spruik their balance transfer offerings when consumers are at their most vulnerable – just after Christmas.
If you’re not disciplined about paying off the balance before the end of the period, any savings you’ve made can quickly be gobbled up by very high interest rates.
According to Canstar, about two thirds of cards offering balance transfer deals revert to an interest rate of 20 per cent or more after the interest free period.
It’s also worth remembering that the ‘zero per cent’ interest only covers the balance you bring across, not new purchases, which will often be charged interest at a much higher rate.
Some cards also charge a ‘balance transfer fee’ of around 2-3 per cent of the amount you are transferring, while others have an annual fee to consider.
Given all these costs and potential risks, some blame balance transfer offers for putting customers into more debt than they can afford, prompting a recent inquiry to recommend tighter restrictions on their use. For now though, it’s up to consumers to weigh up the risks before being tempted by a balance transfer deal.
If you have a credit card problem or are after some free general financial advice, get in touch with one of our ChapterTwo consultants today.