Hi all,
Hope everyone is on track with their financial goals during January of this new year! If you have been, congrats, it is easier than you thought right? If not, February is new start and a new month to regroup and focus your energy to making your finances work for you.
In previous posts, I've elaborated on the benefits of using a credit card (with the proviso that you have self control and don't change your spending habits drastically because of the new found plastic in your wallet).
Today I will discuss a feature of credit cards that some people may not know about and that is ' BALANCE TRANSFERS'.
Balance Transfers (BT) as the name suggests is where your new bank will accept to take on your existing debt from a different credit card, at a special rate that is lower than the usual credit card interest rate.
Often banks and other credit providers will offer special promotions with balance transfers. eg. 0% for 6 months, or 0% for 15 months, or 5% for 5 months. There is usually a lot of deals around in January or February, as people try to take control of their finances as part of the new years resolution.
Let me illustrate with an example.
Let's say you had a mind explosion and you somehow ended up with a Credit Card Debit with ANZ $5,000. Purchase interest rate at 19.95% p.a.
Take up new credit card with NAB using their 0% Balance Transfer for 15 months. Interest rate 0% for 15 months on balances transferred. I've highlighted this because this is an important distinction. There are different rates applicable for balance transfers, purchases, and cash advances.
To transfer that $5000 credit card debt to NAB, you would need to be approved for a credit limit of at least $7142.85 (being $5000/0.7). NAB will give you a balance transfer up to 70% of your credit limit.
*note different banks will have different rules regarding how much of the credit limit you can balance transfer.
Some may also charge a fee for doing balance transfer, eg 1% of the transferred amount (Citibank 12 month promos), please read the conditions carefully.
So ANZ $5k -> NAB $0, the transaction leaves you with
ANZ $0 - > NAB $5,000 balance transfer used out of your credit limit, eg $5000 / $8000 of your limit is used now.
Sure you have $3000 left to use, but any purchases or cash advances will be charged interest from day 1. ie. YOU WILL NOT GET ANY INTEREST FREE PERIOD IF YOU USE THE CARD FOR ANYTHING OTHER THAN THE BALANCE TRANSFER. Any purchases you make will incur interest at the relevant interest rate immediately, and any payments made to the card will be applied to the highest interest rate on the card (so cash advances then purchases then balance transfer).
Immediately put the new credit card that has the balance transfer debt on it, into a draw somewhere and do not use it again until the balance transfer period is over - in case you accidentally buy something on it!
What's the catch?
Well you still have to pay the monthly minimum repayment fees, generally about 2 or 3% of the closing balance. So if you had done a BT of $5k, then at 3%, you would pay $150 for that month. This is not interest. This is paying back the principle of the balance transfer assuming you took advantage of 0% special balance transfer rate. At the end of 6 month 0% interest period, you would have paid 6*150 = $900, leaving $4100 to pay off immediately.
Will this work for you?
Well you need to have enough salary to justify the bank to offer you a high enough credit limit
A good credit history will work in your favour
If you have too many other credit cards or too many expenses, this will work against you as banks take that into account when deciding if they want to give you a credit limit.
Access to easy credit is dangerous in the wrong hands. You must absolutely be sure you will not be tempted to spend irresponsibly and make sure that you have enough at the end of the promo period to pay off the FULL BALANCE!
Current special promo deals going on:
- NAB 0% for 15 months balance transfer (cheapest card is $30 a year annual fee)
- ANZ 0% for 12 months balance transfer (ANZ Platinum CC has the fee waived for the first year - usually $87)
- Citibank 0% for 6 months balance transfer - (Friends and Family promotion with their Signature and Platinum offer (annual fees of $299 signature / $199 platinum waived for life of loan)
What? I'm responsible and have no CC debt...
Well the current credit reporting agencies only have information on which credit providers you have applied to and defaults and that sort of thing. It doesn't show what the limit is, when it was opened/closed and rating. That is changing in MARCH 2014 this year. So it is likely this will not work after March 2014 for cards that have no debt - will still work fine for negative credit card balances .
What if we do a balance transfer from one card to another, but we don't have existing debt on the credit card? Well, the credit provider does not know how much you owe on the other card, so you can still request for the balance transfer. When the balance transfer goes through, your credit card will be in POSITIVE balance. That is, the credit card company owes you money because you have topped up your card.
You can use the positive balance credit card as normal, and the balance will slowly reduce as you spend your credit. You save money because you're not using your own money for however months the balance transfer is available for, leaving your money sitting in the bank earning interest or in the offset account reducing interest you need to pay. eg $5k positive balance from earlier example, to use as my spending allowance, where otherwise I would have had to use my savings money. Each month, I'm paying the minimum principle off the balance transfer, and at the end, I pay everything off in full.
However you can also use the hidden feature of credit cards - you can usually transfer the positive balance that has been created (from the BT) into your savings account, offset account or any other account for that matter really. Because it is technically your own money due to the positive balance, there is generally no fee to take the money out, or if there is a fee, it is usually a one off small amount like $2.50.
Let's say you have a mortgage at 5% interest p.a. If you chuck in $5k in the offset, that's $250 in interest a year that is saved. Your only repayments during the period is the 2 or 3% minimum repayment amount on the balance, and obviously the remaining principle at the end of the period.
You'll need to check with your bank, but some banks allow you to withdraw cash without any fees (or minimal fees) when your credit card is in positive balance. DO NOT TRY to take out cash if it is $0 or negative balance because you will be slugged with 'cash advance' interest rates immediately.
One cool thing is with Citibank, they have an option to get 80% of your credit limit in the form of a Cheque to Self balance transfer. Let's just say when you do request to have the cheque posted out to yourself, you don't necessarily have to deposit it into a credit card account ;) *wink wink*.
