The availability of early access to superannuation, a lack of places to spend money and weaker consumer confidence have seen Australians pay off $6.3 billion in credit since the COVID-19 pandemic began, according to figures released by the Reserve Bank of Australia. 

And if you’re one of the people looking for a better way to pay off your credit card debt, one option is to move that balance over to a new credit card from a provider that offers a competitive balance transfer.

How does a balance transfer credit card work? 

A  balance transfer credit card refers to the process of moving the balance of an existing credit card debt to a new credit card.

These are often offered by credit card companies as a way to attract new credit card customers. 

To sweeten the deal, these lenders usually advertise a balance transfer deal for a certain ‘honeymoon period’. The new interest rate on the balance you moved can be either zero per cent (or a special low rate) for a limited time (can vary from as short as six months or as long as 30 months), depending on the provider. 

Credit card balance transfers are ideal for consumers who want to move the amount they owe to a credit card that offers a significantly lower promotional interest rate and with potentially better perks or benefits. 

Is there a limit to how much balance I can transfer? 

Most credit card companies set minimum and maximum credit limits for balance transfers.

Generally, the new credit card provider will require a balance transfer of at least $500 per request and you are allowed to transfer up to 80 per cent of the credit card limit. For example, if you were approved for a credit card with a $10,000 limit, you could balance transfer up to $8,000 to the account.

Can you also do a balance transfer on a personal loan?

If you’re trying to pay off other types of loans, it’s also possible to transfer other debts to a balance transfer credit card.

In Australia, there are several credit card providers that allow customers to balance transfer a personal loan debt to a credit card. This includes Citi, Coles, Qantas Money and Virgin Money. 

But remember that most other credit cards that offer zero per cent balance transfer rates will only let you transfer debts from other Australian credit cards, store cards or charge cards.

Other types of loans that can be transferred include car loans and home equity loans. However, remember that the policies will differ from bank to bank, so make sure that you read the credit card terms and conditions before doing this. 

What are the benefits of a balance transfer?

• Save money. The most obvious benefit is that balance transfer credit cards give you a chance to save a lot of money if you pay a low or a zero per cent introductory interest rate. At the time of writing, the average standard credit card rate was 19.94 per cent, according to the RBA. This means you could potentially save hundreds of dollars over a year by rolling over your debt over to a zero per cent deal. 
• Consolidation of debt. Another upside to transferring debt is that you can consolidate your debt, making it easier for you to make your monthly payment. Additionally, you’ll only have to deal with one interest rate for all of your debt, if you choose to move all of your loans into one credit card. 
• Pay off your debt faster. When you pay low or no interest on a balance transfer card, it means that more of your repayments go straight to the principal debt rather than interest charges. This means your debt will be paid off in a shorter amount of time. 
• Longer balance transfer offers. Balance transfer credit cards offer introductory period interest rates for up to six months (or most often longer). Depending on the amount of your outstanding balance and the monthly repayments you can afford to make, you can pay off your personal loan debt before this period ends and consequently avoid higher interest charges.  

Things to consider before getting a balance transfer credit card

Like any other financial product, there are things to consider before deciding if a balance transfer credit card is right for you. 

• The length of the introductory period. You can make the most out of a balance transfer if you pay off the entire amount of debt before the end of the low or zero per cent balance transfer period. That is the ideal scenario. Remember that beyond the ‘honeymoon phase’ or at the end of the introductory period, the low promotional interest rate for balance transfers will revert to a standard variable rate. Aim to pay off your balance before this rate applies. If you don’t think you can pay off the balance within the introductory period, maybe it’s best to stick with your current provider or check out other debt consolidation strategies to find an option that will work for you.
• Impact on your credit score. Did you know that each time you apply for a credit card, it can have an impact on your credit score? While one application won’t have a big effect, making multiple applications in a short period of time could hurt. Before applying, make sure to check if your credit score is good enough to be approved.
• Balance transfer fee. While a zero per cent balance transfer headline rate is tempting, keep in mind that some providers charge a one-time balance transfer handling fee, which is usually around 1 per cent to 3 per cent of the total debt that you transfer. 
• Closing out your old account. Once the debt is transferred to your new credit card, make sure to close out the previous loan account to avoid any additional fees or charges. It will also  help you avoid the temptation to create more debt.
• Spending during the introductory balance transfer period. If you swipe your new balance transfer credit card for any purchases, the standard purchase rate will apply to those charges. Any repayments you make will be allocated to these debts before your balance transfer debt. If that happens, you could end up carrying the balance until after the introductory period ends. So before using your card for spending, try to focus on paying off your existing debt. 

Conclusion 

Transferring your loan balance to a credit card should be used as a tool to pay off debt faster and to save more money on interest without hurting your credit score. 

After understanding the fine print of the terms and conditions, doing your math before applying and establishing a realistic payment plan, taking advantage of a competitive balance transfer deal can be a good financial move.