A balance transfer is when a person with credit card debt with one or multiple providers (like a bank, or store that offers credit) transfers that debt to another provider. New customers are usually offered lower rates of interest for a set period of time in exchange for them transferring their debt to the new provider
Why would I need a balance transfer?
The main aim of balance transfers is to help consolidate debt and reduce interest charges, so you can pay off any outstanding balances faster.
If, for example, you transfer the balance of your current credit card(s) from one bank to another on a 0% balance transfer offer, you’ll pay no interest on that debt for 12 months (provided you comply with any terms and conditions, including by paying the minimum repayment each month).
This means you have 12 months to get on top of your credit card debt knowing exactly how much there is to pay, as you won’t be accruing interest on top. A balance transfer can also be good if you have a number of credit cards, because you can transfer balances from multiple credit cards making payments easier to manage, so you don’t miss them and incur late payment fees.
How to make the most of a balance transfer
A recommended approach is to pay off a set amount each month – which will hopefully be enough to cover the full amount once the 12 months is up. Knowing exactly how much you’ll owe each month is easier to budget for as there are no surprises when your credit card statement arrives.
So for example, if your overall credit card debt was $4,800, you could make a set monthly payment of $400 which would mean your credit card debt would be fully paid off by the end of your 12 month 0% balance transfer period.
Things to watch out for
The special 0% rate only applies to the balance you transfer to the new credit card. Any new purchases or cash advances you make on the new card will be charged at the standard purchase or cash advance interest rate with no interest free days.
The set period of time for the low balance transfer rate is particularly important to note. The 0% rate offer is not permanent, so if you do a balance transfer you should also put a plan in place to make the most of it.
Setting a credit limit you know you can service is a good place to start.
Pay off high interest balances first
At BNZ when customers make a payment to their credit card, it goes towards the highest interest rate balances on their statement first. This means they’re always paying off the balances that cost them the most, first. So for customers who take up a 0% p.a. balance transfer, any purchases or cash advances on their statement, for example, will be paid off first. You will always have everyday spending needs so this feature can really help ensure interest costs remain at a minimum. Just remember that interest free periods usually don’t apply when you have a transferred balance on your credit card.
So, what’s in it for the bank?
Banks use balance transfer offers to attract new customers. If your balance transfer was worth $2000 and your new credit card had a limit of $3000, you would still theoretically have $1000 available to use for purchases. But remember, the 0% p.a. balance transfer rate would apply only to the $2000 you transferred.