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HOW TO RETIRE EARLY
MONEY DECISIONS IN YOUR 20's FOR EARLY RETIREMENT IN YOUR 40's.
You Don’t Actually Have to Pay Credit Card Interest. Here’s Why.
Posted on: 07 / 10 / 2017
For better or for worse, most people in their 20’s and 30’s have credit card debt. In fact, according to Finder.com.au, 70.19% of Australians own a credit card, with the average debt being around $3130.
 
Many of us struggle to make a dent in this debt, often paying back just the minimum repayments which are mostly interest anyway. What you may not realise, however, is there is an easy, gimmick-free way to stop paying interest on your credit card and start repaying your debt.

The simple solution to climbing out of the interest spiral is a balance transfer. In this guide, I’ll explain exactly what balance transfers are, how they work, what to look for when deciding which financial institution to get yours from, and how financial institutions assess balance transfer applications.
What is a Balance Transfer
A balance transfer allows you to transfer the debt you have on one or more credit cards onto a new credit card with a new bank.
  
A balance transfer can help you start saving on interest repayments immediately as banks often offer special low/no interest periods to entice new customers into ditching their current credit card provider and signing up with them. And, the best thing is, you don’t have to get permission from your current credit card provider to transfer your debt with them to a new card with someone else
What to Look For When Shopping Around for Balance Transfers
Not all balance transfer offers are created equal, which is why it is important to consider all of the terms and conditions carefully.
  
But before we get started on what to look for from the banks, it’s worth mentioning that you need to know what to look for from comparison websites.

Many people don’t know that while comparison sites show different products from different financial institutions, they don’t show all of the deals that every financial institution has to offer. The best deal you can find on a comparison website might still be beaten in-store by that same bank or by a competitor. Make sure you save the most money by using multiple comparison websites and calling or visiting the financial institution you’re interested in before you sign up online.

Now that’s out of the way, let’s talk about comparing the offers you find. You need to compare your current credit card’s interest rates and fees with the following features of a potential new card
• Annual fees: Even if the annual fee on your new card is higher than that on your old card, you may still save money on interest.

• Balance transfer fees: Banks usually charge you 1-3% of the balance that you’re transferring. Some banks offer credit cards with no balance transfer fees, but they can have substantial annual fees to compensate for this.

• Late payment fees: Make sure that you can afford to make the required repayments on your balance transfer card before you sign up, otherwise late payment fees might see you getting further into debt than you already are.

Low interest/interest-free period: These are usually 12-24 months, but they can be as long as 36 months. It’s worth shopping around because the length of the interest-free period is directly related to how much money you’ll save.

• Interest rates once the promotional period has expired: Be aware that some balance transfers revert to cash advance rates once promotional periods are over and these are significantly higher than standard purchase rates.
Doing the Math: How A Balance Transfer Can Help You Save
Let’s use a credit card debt of $3000 at an interest rate of 18% as an example of how a balance transfer can help you save money.
  
If you only pay the minimum repayment on this card (starting at $61/month), it will take you 25 years to repay the debt, and you’ll end up paying $9521 back. A whopping $6521 of this lifetime repayment will be interest - that’s over double your original debt!

Say, however, you transfer this debt onto a credit card that has:
• A 24-month interest-free period 
• No balance transfer fee
• Interest of 19% once the interest-free period is over and;
• An annual fee of only $90
Then, by paying $61/month off of your balance, you’ll reduce your debt to only $1716 in just 2 years.
  
Obviously, it’s ideal to pay more than your minimum repayments and get your credit card debt eliminated within the interest-free period. But even if you keep only paying the minimum payment once the interest-free period is over you’ll still end up repaying a total of $6703, and $3523 of that will be interest. In this situation, with a balance transfer, you’ll repay your debt 5 years sooner and will save $2818.

If you’d like to calculate how much money you can save using a balance transfer, I recommend punching your current and potential credit card details into ASIC’s credit card calculator or using a balance transfer calculator on the website of the bank you’re considering choosing.
Am I Eligible for a Balance Transfer?
If you’re eligible to get a credit card, you’re probably eligible to get a balance transfer. While I can’t offer you advice that is specific to your unique financial situation, what I can do is tell you a few of the factors that banks take into consideration when deciding whether to approve or deny your balance transfer application.
  
These criteria include:
• Your working situation: People who have been in full-time employment for a long period of time are more likely to be approved than those who are unemployed or self-employed with little evidence of their income. Whatever you do, don’t lie on this part of the application as your potential credit card provider will usually call your employer to check that what you’ve said about your employment status is true.
  
• Your credit rating: As with other financial products, your credit rating will be used to determine your eligibility. It’s a good idea to get a copy of your credit report before you apply for anything, and if your rating is less than desirable talk to a financial planner about how it can be improved or which financial products you’re more likely to be eligible for.

• If the banks have already knocked you back: If you’re applying for a balance transfer, it is critical that you don’t apply for every single transfer on offer and hope that one of them sticks. Banks can see whether you’ve made multiple applications and if they’ve been rejected, so the scatter gun approach won’t work in your favour.

• Who your current credit card is with: Most banks won’t allow you to do a balance transfer within the same bank or to transfer the balance of overseas credit cards.

• The size of your current credit card debt: The size of your debt won’t necessarily affect your eligibility, but it will determine how much of your balance you can transfer. Most banks won’t let you transfer your whole debt; they usually cap transfers at around 80-90%. Make sure you factor the repayments you’ll need to make to the remainder left on your old card into your calculations when deciding if a balance transfer is right for you.
Other Things You Need to Know About Balance Transfers
Now that we’ve covered the balance transfer basics, there are just a few other things that conscientious credit card holders such as yourself need to know about:
  
Balance transfers don’t happen overnight. Your application will take time to be approved, and the actual balance transfer itself can take a couple of days after approval. I recommend that you factor up to four weeks of repayments on your old card (from the date of your application) into your budget.

Most interest-free deals apply only to the balance transfer amount. This means that if you make any additional purchases on your new card, you’ll start paying interest on them straight away. If you’re serious about repaying your debt, cut up your new credit card as soon as it comes in the mail.

There’s no point getting a balance transfer if you keep both cards. It’s critical that, once you pay off the small remainder on your original credit card you shut the account down. Otherwise, you may find yourself with literally twice as much debt than when you started your journey to financial freedom.

Balance transfers aren’t for everyone. If you’ve got multiple debts like personal loans, credit cards and old balance transfers, you might be better off getting a debt consolidation loan.

Be wary of special features and offers on new credit cards. I’m not talking about low/no interest promotions here, but cash back deals, insurance discounts and other discounts that credit card companies use to lure you in. While these features may be of some use to some people, they should never be the main selling point.
What If My Situation is Different?
As with all our posts, information provided here is considered educational and does not constitute formal financial advice. 

If you do feel you need assistance with managing your debts, you can always contact the financial counselling offered by Money Smart. You can find more information here.



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