Manage credit card debt with Balance Transfer promotion rates

Credit cards have been part of the Australian consumer finance landscape for the past 35 years.  At least two generations have grown up enjoying and taking for granted the spending flexibility that credit cards offer.  Other people are resigned to never being free of the on-going monthly charges and having to permanently build them into their budgets.  The reality is that credit cards are a wonderful servant but a terrible master!

It is easy to slip into a credit card trap by only paying off the minimum monthly payment.  If you only pay off the minimum payment required each month (assumed to be the lesser of 2.5% of the balance or $20), it will take you over 15 years to fully repay an outstanding credit card balance of $3,000 assuming an interest rate of 17.99%, no additional purchases are made on the card, and all minimum payments are made by the due date – that is, no late payments.

The only way to bring your credit card under control is to pay off more than the minimum payment each month.  Using the above example, if you paid $50 a month more than the minimum payment, the $3,000 debt would be repaid in 44 months or in two years if the additional monthly payment was increased to $100.

This example shows the difficulty in getting out of credit card debt.  It highlights the need to have a budget and only use your credit card for larger, unavoidable expenses which you know you can repay over (say) three months.  Use the card for everyday living without religiously paying off the statement balance each month and you are asking for trouble.

To escape the credit card trap, apart from careful budgeting and rigorous self-control on new spending, you need to reduce the interest cost of the hard-core balance owing.  The best way to do this in the short term is to take advantage of one of the Balance Transfers which are now offered by most Australian credit card issuers.

Banks, financiers and specialist credit card issuers use Balance Transfers as a key marketing tool to get cardholders to submit a credit card application to switch to them.  The bait can be a low or even a zero interest rate for a ‘honeymoon’ period.  Most offers are either zero percent or 4.9% per annum on the balance transferred for a period of four or six months although some offer the discounted rate ‘for life’.

The transferred balance is initially kept separate from your normal purchase transactions and you will be required to make minimum monthly payments on that balance – which is combined with any other payments required on the card.

If any balance still remains owing on the balance transfer at the end of the honeymoon period, the interest rate is reset to the prevailing interest rate on outstanding purchases – but can go even to their cash advance rate.  They call this the ‘revert’ rate.   You should carefully check the applicable revert rate and work out whether you will actually be better off after the balance transfer.

With Balance Transfers, the key is to put everything into paying off the balance off prior to the honeymoon expiry and not to make any new purchases on the card in the interim.

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