Watch out when passing the buck
Of more than 2000 Australians surveyed by creditcard.com.au, one in five said they had credit card debt of more than $8000, and of these 68 per cent are forced to hunt down new credit cards to transfer debt.
Balance transfer cards come with 0 per cent interest for a limited time, offering debt-strapped cardholders an escape from crushing interest rates.
But creditcard.com.au founder and chief executive Roland Bleyer says it is now common for people to constantly shift from one balance transfer credit card to another.
"That's what people are doing - bouncing around from one 0 per cent balance transfer card to another," Bleyer says.
"I received an email recently from someone who said they had avoided paying their credit card for five years thanks to these cards."
Playing credit card musical chairs is an effective way of delaying debt repayments, but what happens when the music stops?
Bleyer says many consumers are lulled into a false sense of security and don't take advantage of 0 per cent interest rates.
"Balance-transfer cards are definitely recommended and they're definitely a good deal, but the problem is people are being slack and not paying off their debt in the interest-free period," he says.
"They also have to be careful about their credit ratings. If people are moving their debt and continually applying for new credit cards, it's going to ring alarm bells."
Banks have cottoned on to the rising popularity of balance-transfer cards, with more than 30 such cards currently on offer. A year ago there were no more than nine 0 per cent interest balance-transfer cards on the market.
Bleyer says the cards are used by banks as a way of luring customers away from other financial institutions.
To do this, banks are beginning to increase the average nine-month 0 per cent interest period to 12 months.
They are also reaping a profit from those who fall for the trap of failing to close old credit cards after signing up for a new one.
Another trap is waiting for those who aren't prepared for the steep interest rates once the promotional interest-free period ends, particularly on gold or platinum cards.
"These cards have a higher annual fee, plus a higher interest rate," Bleyer says.
"Failure to either pay the balance off in time or achieve another balance transfer is a nice bonus, giving banks the opportunity to make much more money than they would from issuing a lower-rate card."
The 2013 Credit Card Landscape Survey also found 45 per cent of credit card users don't pay the minimum monthly repayments.
Bleyer advised that it's best for people to use 0 per cent interest balance-transfer cards to pay off debt quickly and avoid racking up years of repayments.
"People need to make better financial decisions to pay down their debt," he says.
In The Sunday Age this weekend How to make the most of home renovations Plus, Penny Pryor's new column and Sunday Money's regular team, including Mark Bouris and David Potts.
Frequently Asked Questions about this Article…
Balance transfer credit cards let cardholders move existing credit card debt onto a new card, often with a 0% interest promotional period. A survey of more than 2,000 Australians found many people use these 0% balance transfer offers to escape high interest rates — one in five had credit card debt over $8,000 and 68% of those hunted for new cards to transfer that debt.
Promotional interest-free periods give you 0% interest on transferred balances for a limited time so you can pay down debt without interest. The article notes banks are increasing average offers from around nine months to about 12 months, and there are now more than 30 balance-transfer cards on the market compared with nine a year ago.
Constantly moving debt between 0% cards can damage your credit rating because repeated credit applications can 'ring alarm bells' with lenders. It also risks you running out of promotional options or failing to pay off the balance before the interest-free period ends, which can lead to steep interest charges.
Yes. If you don’t pay off the transferred balance in time or can’t arrange another transfer, the standard interest rate applies — which can be particularly high on premium gold or platinum cards that also charge higher annual fees. Banks can profit if customers fail to close old cards or miss the end of the promo period.
The survey found worrying repayment habits: 45% of credit card users don’t pay the minimum monthly repayments. The survey’s founder warned many people are lulled into a false sense of security and fail to use the 0% interest period to reduce their debt.
Use a 0% balance transfer card as a short-term tool to pay down debt quickly and avoid years of repayments. Have a realistic repayment plan to clear the balance within the promotional period, close old cards you no longer need, and avoid repeatedly applying for new cards which can hurt your credit rating.
Yes. The article warns that continually applying for new credit cards to transfer debt can trigger lender concerns and harm your credit rating, so frequent applications should be avoided unless you have a clear repayment strategy.
Check the length of the 0% promotional period, any balance transfer fees, the card’s annual fee (especially on gold or platinum cards), and the standard interest rate after the promo ends. Also plan how you will pay off the balance before the promotional period finishes and decide whether you should close old cards after transferring.
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