New traps on balance transfers
Balance transfer offers can be a great way to clear credit card debts but, according to new findings by financial comparison website RateCity, the offers are not as good as they used to be.
RateCity has found credit card providers have hiked up their revert and purchase rates for balance transfer deals and rates "for life" of the debt transferred are no longer widely available.
But balance transfer offers can still be a blessing for anyone struggling to pay off credit card debt - as long as you understand how they work and the possible traps.
The most common offer is 0% for six months. When comparing offers it's vital to find out what interest you'll pay after the introductory period ends - especially if you don't think you'll be able to pay the entire debt within the promotional period.
According to RateCity, the average revert rate has increased by 3.85% since December 2007, meaning that for a $5000 debt on a balance transfer credit card after the intro period, a credit cardholder could be paying $16 a month more than they were in December 2007.
And don't assume the rate on the transferred debt will revert to the standard purchase rate - many providers charge the cash advance rate, which is usually higher.
If you have a substantial debt that you can't clear in six months, a balance transfer offer with a low rate for life might suit you better. Unfortunately these are now few and far between. In December 2007 RateCity recorded 84 balance transfer cards with a low rate for life whereas now there are only three!
It's also a good idea not to make any new purchases on the new card while paying off your debt.
That's because most institutions apply repayments to the transferred balance first. If you've spent up on the card, you'll be paying interest on those purchases until you've paid off the balance transfer.
In a move applauded by many, NAB has announced that from January 14 2011, card transactions attracting the highest interest rate would be paid off before the lower interest rate. Let's hope other institutions follow suit.
You should also pay attention to the annual fee - especially if you have a relatively small balance.
Many offers are on gold cards - which have a fairly high annual fee. This could really eat into any interest savings.