By Betsy Westcott
So, we’ve just hit the beginning of February. How are those New Years Resolutions coming along? If one of your resolutions is to get your credit card debt under control then you’re probably pretty tempted by all the 0% interest Balance Transfer offers being advertised by all the bank, right?
It’s a pretty tempting offer and it seems pretty logical to move money from a card where you are paying an average of 20% in interest to a card where you pay 0% for a set period of time. Before you do, first consider a few things to decide if it’s the right debt solution for you.
According the ASIC Money Smart website Australians have accumulated around $34 Billion in credit card debt. That’s an average credit card debt of $4,400 per credit card holder.
Many of the balance transfer offers will only let you transfer 70% of the limit of your new card. So, if you were transferring $4,400 you would have to apply for a new credit card with a limit of at least $6,300 to bring the full $4,400 across.
The risk here is that you now have $1,900 of ‘available’ funds. If you spend these ‘available funds’, you will not be paying 0% interest but instead you will pay the purchase interest rate. Not to mention increasing your credit card debt again.
Often these 0% interest periods last only 6 to 12 months. Do you have the capacity to repay your debt in full over this time frame? If, using the earlier example you balance transferred $4,400 at 0% interest for 12 months you would need to pay at least $366.67 per month to ensure you had paid the balance off by the end of the promotion period. Do you have that discipline? Most banks can arrange a direct debit to pay the credit card every month. I suggest setting it up on the day your pay comes in to ensure you’re knocking that balance off in time.
Be sure you check what interest rate the funds will roll over to at the end of the period – cash advance rate or purchase rate? Often it will be a cash advance rate.
A cash advance rate is the most expensive rate on a credit card and doesn’t attract any interest free days meaning you can end up paying a lot of interest very quickly once the promotional period ends.
If this occurs you have two options, either transfer the balance to yet another credit card (be sure to close out your old card if you do) or you may want to consider consolidating the debt into a Personal Loan.
Finally, consider whether you’ll be tempted to spend the balance again once it’s paid off. As mentioned, when you pay back funds on your credit card they appear as the very attractive ‘available funds’.
Think about the next time you pass that fabulous shoe sale, you don’t have the cash but there’s a little credit card in your pocket with ‘available funds’ that you could use… are you going to be able to walk away? If not, either chop the card up so you can’t use it for new purchases or perhaps skip the whole balance transfer exercise and just consolidate all your credit card debt into a personal loan.
A personal loan has a set repayment schedule and specific loan term meaning that you know that as long as you make the repayment on time you will eventually pay that debt out. There’s no ‘available funds’ and card linked to tempt you to spend what you’ve repaid. So, whilst a personal loan may attract interest, you’re going to be better off in the long run because you will actually clear your debt.
Interest free offers are great but take the time to know who and what you’re getting into before doing so. If you’re unsure, talk to a banking specialist to help you way up the options and decide what is the most suitable solution to help you become debt free.
Betsy is a Bank Manager in Sydney. After an early career in the Hospitality & Tourism industry she made the switch to Banking and hasn’t looked back. Betsy gets her kicks out getting to know her customers personally, understanding their financial and lifestyle ambitions and tailoring them a personal banking solution to make those ambitions a reality.
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