Could a balance transfer help you ditch holiday debt?


Australians spent up a storm in the lead up to Christmas last month, forking out a record $37.8 billion on the likes of food, clothing and household goods between December 1 and Boxing Day, data compiled by the Australian Retailers Association and Westpac shows.

Between retail spending and other expenses like travel, it's easy to see then why the Christmas and summer holiday period can be one of the most expensive times of the year for many.

Given these additional holiday season costs, it's also not surprising that a significant number of people turn to credit to cover their spending. In fact, nearly half (49%) of Australians surveyed as part of a recent study by comparison website Finder admitted that they racked up debt over Christmas.

how credit card balance transfers work

While a third of people with debt said that they would be able to pay it off almost straight away, the majority of those surveyed admitted that it would take months to clear it.

Time needed to pay off holiday season debt

So is there anything that Australians with holiday season debt can do to avoid being hit with interest payments? For credit card customers, one option worth considering is a balance transfer.

How do balance transfers work?

In essence, a balance transfer is relatively simple: it involves transferring the existing balance on your current credit card to a new card.

Balance transfer credit cards typically come with a 0% interest rate, or a relatively low rate, for a set period of time (e.g. 12 or 24 months), which means that if you're able to pay off your balance during that period you'll potentially avoid paying interest altogether, or pay less interest than you would have on your old card.

Sarah Megginson, money expert at Finder, says that balance transfer offers are generally best for people who are serious about fully paying off their debt though.

"The best way to use a balance transfer card is as part of a debt repayment strategy - it's for when you want to really get on top of your finances and knock that credit card debt over for good," she says.

"Look at that balance as a payment plan. So if you've moved $5000 to a 0% interest card for 18 months, then work out how much you would have to pay off each payment period to completely repay it in 18 months so you never actually pay any interest."

What to look for, and what to avoid

First and foremost, Megginson suggests looking at the balance transfer rate available on a prospective card (ideally it will be 0%) as well as the length of the balance transfer offer which should be long enough to allow you to completely pay off your debt. Next up is any other costs linked to the card.

"One of the things to consider when you're comparing different options is to look at the fees, because some cards do charge balance transfer fees which can be up to 3%," she says.

Perhaps even more crucial is thinking about how you will use the new card though. As Megginson explains, while the balance you bring over may be subject to a 0% balance transfer rate, any new purchases you make could attract a much higher rate.

"The only reason that credit card companies offer 0% interest rates is because they are quite hopeful that you're ultimately going to end up paying them a higher amount of interest in the end.

"So the big trap to avoid is moving your balance across and then keeping up the same spending habits with your new credit card. If you do that you're really not going to get the benefit of it because if you're adding new expenses, you're just going to end up in exactly the same spot within a few months."

Megginson also encourages cardholders to avoid any temptation to spend by closing their old account.

"The other thing to look out for with a balance transfer is cancelling your existing card at the same time as you transfer your balance to a new card. If you keep both, that's two opportunities to get into more debt, which could leave you in a worse position than when you started."

While balance transfers may be a useful option for many, they might not be the right fit for everyone with credit card or another form of debt, so for alternatives, check out these other options to get debt under control as outlined by ASIC's MoneySmart.

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.