A balance transfer is moving an existing debt, such as credit card balances or car loans, from an account to another, and it is usually offered with lower interest rate. If your debt has gotten out of control or you’re committed to reform your spending habits, a balance transfer can be good for you.
The opportunity to pay off a debt faster is one of the attractions of a balance transfer, at a low or even 0% rate. It means that, for the most part, your payment will be going towards paying off principal instead of interest.
As with most financial services, you better have a good credit standing. Most times, lending institutions would turn down someone who had a bad credit score. In this case, ask your lender about any promotions available, like a low-interest option, to see if you can switch to that.
There’s a chance you can skip the credit checks if you have an existing relationship with the lender.
Repayments & interest charges
In the order of balances with the highest to lowest interest rates, all repayments will be applied to your statement.
For an agreed interest-free period (6 or 12 months), your transferred balance won’t accrue an interest. After the interest-free period, if any of your transferred balance hasn’t been paid off, you’ll be charged the standard purchase interest rate.
Making the most of a balance transfer
Paying off a set amount each month is one of the better approaches for a balance transfer. Hopefully, this will be enough to cover the full amount once the interest-free period is up.
Budgeting is easier if you know exactly how much you will owe every month, and you won’t be shocked when your statement arrives.
Balance transfer will work provided that:
- If not the full balance, the consumer manages to pay off most of the debt before the teaser rate expires.
- The transfer fee and any other fees don’t cost more than what the consumer saves over the term of the teaser rate.
If you liked our “Balance Transfers: How To Use Them Effectively” and took away some valuable and useful information, check our blog space regularly for more tips on how to budget and updates on the best budgeting apps in Australia.