Zero percent credit card balance transfers offer a chance to get off the debt treadmill, but beware of the pitfalls
Australians are increasingly avoiding credit cards, but they can be used intelligently to break your debt, even if it takes discipline.
It is well known that using the interest-free period on a credit card for everyday purchases so that you can keep as much money as possible in your mortgage clearing account can save you thousands.
But in order not to backfire on you, you need to make sure you pay off the credit card before the interest-free period expires.
Likewise, taking advantage of zero percent credit card balance transfers offered by financial institutions looking to attract customers from their competitors also requires an eagle’s eye.
“A zero percent balance transfer is a great opportunity to soothe debt because the monthly repayment you make offsets the debt, not the interest, as long as you don’t continue to use the card,” he said. Steve Mickenbecker told Canstar Group Executive Financial Services Steve Mickenbecker. NewsWire.
“The trap people frequently fall into is to keep using the card for other purchases and not reduce the amount they owe the bank for the zero percent interest term.”
To escape the debt trap, he offers a new solution.
âPut the credit card in the freezer at home or somewhere that will keep it out of the reach of temptation,â Mickenbecker said.
âThe challenge is to write off the debt during the interest-free period, which usually requires you to reassess your budget to reduce your spending.â
After an interest-free promotional or introductory period, interest climbs well above 20% to reach the ârate of returnâ.
For comparison, the average credit card interest rate is currently 17.3%, according to the Reserve Bank of Australia.
RateCity research director Sally Tindall said some daily credit cards still charge customers more than 20% interest despite the historically low cash rate of 0.10%. She said anyone paying double-digit numbers was “being robbed”.
âHigh fee, high rate cards can trap some people on a debt treadmill as interest and fees keep piling up,â Ms. Tindall said.
âTo someone struggling with credit card debt, a zero percent balance transfer deal might seem like a white knight, but a lot of these cards are full of pitfalls that have the potential to get you into more trouble. ‘Hot water.
“However, if used with care, some balance transfer transactions can save you time paying off debt, but only if you set very strict rules for yourself.”
An easy but dangerous first mistake to make was forgetting to cancel the old card, which would likely mean double the annual fee “and if you’re not careful, double the debt,” Tindall warned.
Another trap to fall into is assuming that a longer interest-free period is better.
The average deal is around 12 months, but some cards offer interest-free terms of up to 36 months.
âRemember, the annual fee is added to your card every year you open it,â Ms. Tindall said.
“It also gives people lots of opportunities to start accumulating new debt on the card.”
Ms Tindall also recommends putting the card in the freezer to resist the temptation and suggests a monthly charge to ensure the full amount owed is paid before the interest-free period ends.
âThe banks are counting on the fact that some people will slip up. Don’t let that be you, âMs. Tindall said.
“The last thing you want is for this honeymoon to end with a mountain of debt and an interest rate north of 20%.”
Another important point to consider if you are considering a credit card balance transfer is that some cards may charge an upfront fee – either a fixed dollar amount or a percentage of the transferred balance.
It might be worth it if you are looking to consolidate various credit card debt, but keep in mind the limits that might be on the total amount of money you can bring or the number of cards you can transfer from. debt, Mickenbecker said. .
Annual fees vary wildly, so check them out.
RateCity tips on what to look for in a balance transfer card:
â¢ Balance transfer fee (aim for 0%)
â¢ Annual fees (aim for $ 0)
â¢ The interest rate at the end of the honeymoon
How to overcome credit card debt:
â¢ If you can’t pay your bill on time, ask your bank to move to a lower rate card or consider switching to a personal loan or 0% balance transfer credit card.
â¢ Make a plan to repay the money within a certain time – direct debit right after you get paid can help keep you on track
â¢ Pay the highest interest rate or the smallest amount of credit card debt first.
â¢ Close every credit card account when you pay it off
â¢ If you keep your card, lower your credit limit