What you need to know about credit card balance transfers
Putting aside the rort of how repayments were once handled on balance transfer cards, I thought they were a great product to help you get out of debt. The idea of transferring debt from a credit card paying, say 17%, to an offer of, say 0%, makes good sense.
Sadly, the savings may not be as great as you would hope. Until their issuers are forced to clearly reveal the true cost of these cards, we will continue to be blinded by headline rates.
According to comparison site ratecity.com.au, there are 76 cards offering a 0% interest rate on balance transfers for up to 24 months. Of these, the average revert rate is 19.5% and the average annual fee $102. Three of these cards charge a handling fee of either 1% or 3% of the balance being transferred.
As many as 19 credit cards in total now charge a balance transfer "handling" fee. I'm not sure what it's for, other than the obvious - to claw back some of the losses of offering a 0% introductory rate.
So what's the true cost of, say, a credit card that offers a 0% interest rate? Not 0% that's for sure. To work out the effective cost of these deals, you need to take into account any annual fee charged, any transfer fee and, of course, the size of your debt.
Take Citibank's Platinum Rewards card. It's offering 0%pa on balance transfers for two years. A Platinum Rewards card, as you would expect, is not cheap. The purchase rate is 20.99%. The cash advance rate is 21.74% (that would apply to any unpaid debt after the two-year introductory period). There's an annual fee of $199 and a 3% transfer fee.
The total cost of transferring, say, a $5000 debt to this 0% balance transfer deal is effectively 10.19%pa over the two years. In fact, you would save only $16 a month over the two years by moving from a card that charged 17% (assuming no annual fee) to this card - not as much as you would think. Of course, the more debt you have to transfer the better the result (see table).
Citibank's head of cards, Alan Machet, says his staff would never recommend small balances be moved over to this particular balance transfer card. "Our 0% for 12 months Clear Platinum Low Rate card with a low annual fee and no balance transfer fee is more suited. Consumers need to be certain that they transfer to the right balance card."
RateCity CEO Alex Parsons says these 0% deals are not offered out of the goodness of providers' hearts. "They know they will keep a certain percentage of balance transfer customers in the longer term," he says. This outweighs any loss from the hot deal they gave on the transferred balance.
Which goes back to my concerns about what a balance transfer fee is doing on a product that is supposed to help you get out of debt. I can understand annual fees, especially on rewards cards, but let's not say "0% balance transfer rate" and slap on a transfer fee to pick up the revenue slack. Home owners have the average annual percentage rate or true rate to compare home loan deals. With new fees now being added to balance transfer cards, credit card holders too could do with a "real" true rate.