Should you switch credit cards?

Credit card balance transfer deals can help you pay off your whole balance quickly … but only if you choose the right one. In today’s post, our friends at Your Mortgage discuss currently available deals and shed some light on the traps to avoid.

If you have a higher balance ($6,000 or more) and can only afford low repayments, however, they can easily cost you more and some can have a real sting in their tail. The banks have designed the offers to tempt you in with the low rate but hit you with the really high rate while you’re still owing some money.

For this reason, if you think there’s any chance of you not paying off all your debt within the low-rate period, it’s vital to look beyond that introductory rate that’s always in huge fonts on the ads and consider both how many months the low rate lasts and the annual fee. Work out how much you have to repay each month to get to a zero balance before the higher rate kicks in, and then ask yourself whether you can really achieve this.

Don’t Use the Card for New Purchases

Some balance transfer cards have no interest-free days on new purchases. That means interest will be charged on any new purchase from the moment it’s made, instead of after the traditional 55 interest-free days you get with normal cards. Here’s why.

Ninety of the balance transfer deals we found had interest rates that jumped to above 15% at the end of the balance transfer period. One card will charge a massive 22.49% on new purchases made during the transfer period.

The biggest mistake you can make is to assume that a 0% deal is the best available; the time you’re given to pay off the debt at the discounted rate can be just as important.

So don’t use the card at all until the whole transferred balance is paid off and you have a zero debt. Then double-check the interest-free period available before you put any new purchases on the card as they don’t all offer the generous 55 days.

Then there is also the problem of accumulating more debt that you might not be able to afford. If you are switching cards to take advantage of a lower interest rate, then what you are really doing is trying to get out of debt. You could find the cheapest and longest balance transfer deal on the market, but it won’t matter if you keep spending on it. Trying to pay off your debts with a balance transfer card, but using it to spend too is just one of the things you should not do with a credit card.

Shop Around

Get into the habit of reviewing your current card and shopping around for a better deal every 6-18 months. Don’t be afraid to switch if a better deal is on offer, because switching means you can take advantage of the low introductory rates banks use to lure new business without getting hit by the high rates.

Put a reminder in your diary or Outlook calendar for a few weeks before the introductory rate on your new card runs out, or use’s Balance Transfer Reminder, which you can find on the credit card offer page. If you are still in debt, compare the balance transfer deals that are around at that time and switch your debt to a new card. Alternatively switch it to a normal card that has a low ongoing rate, or take out a competitive personal loan with a bank.

You don’t pay any exit fees or penalties for jumping ship and if banks keep up the current rate of fresh deals and promotions you could effectively never pay interest again.

Whatever you do, don’t ‘do nothing’ and start paying 20%+ interest when you have no reason to.

There Are Downsides…

You do need to be aware of a couple of potential downsides, though.

Firstly, the whole process of switching cards can be time-consuming and involves a fair bit of paperwork, so be sure to allow enough time to sign up for a new deal before the introductory rate on the old card expires. Once you have filed your application it normally only takes one or two weeks before your new card arrives, but sometimes it can be delayed.

Secondly, each time you apply for a card a new entry appears on your credit record. Multiple applications, especially if they occur within a short period of time, can be one of many negative signals when applying for serious credit such as a home loan.

Credit Card Balance Transfer Deals in a Nutshell

The biggest mistake you can make is to assume that a 0% deal is the best available. The length of time you’re given to pay off the debt at the discounted rate is actually just as important as the interest rate.

  • None of the current balance transfer deals will enable you to be debt free within the transfer period if you have a balance of $3,000+ and you repay $200 per month.
  • Only one card will enable you to be debt free within the balance transfer period if you have a balance of $6,000+ and you repay $500 per month.
  • If you have a $10,000 debt, you’ll need to repay $1,000 per month before any of the current balance transfer deals will give you the chance to be debt free within the transfer period.
  • Most cards are designed to ensure that you will still owe some money at the end of the balance transfer period, which is when they hit you with a much higher interest rate (up to 22% on some cards).
  • Make sure you don’t use the card for new purchases during the transfer period, because they will be charged at a higher interest rate and there may not be an interest-free period.
  • If you have a $10,000 card debt and can afford to repay $1,000 per month, the best available balance transfer deal will save you over $550 in interest.

Note: the industry observations made in this post were accurate as of 27/11/2012.