Credit card balance transfer explained: when it helps

Customers who carry a balance on one card sometimes hear about "balance transfers" as a way to reduce interest. It can help in specific situations, but it's not a magic fix.

How it works

A cardholder moves an outstanding balance from one card to another card, often from a different bank, that offers a lower interest rate for a limited period. The new card pays the old card's balance, and the customer repays the new card.

Costs involved

• A processing fee, often a percentage of the amount transferred
• The promotional rate applies only for a set period
• After the period, the regular rate applies to any remaining balance
• New purchases on the new card may carry regular interest

When it can help

• When someone has a clear plan to repay the balance within the promotional period
• When the total cost, including fees, is lower than continuing at the old rate
• When the person has stopped adding new spending

When it doesn't help

• If spending continues on the old card, leading to two debts
• If the balance isn't repaid before the promotional period ends
• If fees outweigh interest savings

Alternatives

• Converting the balance into EMIs on the existing card
• A personal loan at a lower rate, with careful evaluation
• Budgeting to pay down the balance faster

How to explain it

"A balance transfer moves your card debt to another card at a lower rate for some months. It only helps if you stop new spending and repay within that time. Check the fees first."

A short example

Rita has a balance on her card at a high interest rate. She transfers it to a new card with a lower promotional rate and a processing fee. She stops using the old card, sets a monthly repayment plan and clears the balance before the offer ends. Her friend did the same transfer but kept spending on both cards, ending up with more debt.

Questions customers ask

"Will a balance transfer affect my credit score?"

Applying for a new card involves a credit check. Managing the transfer well can help in the long run; adding more debt can hurt.

"Can I transfer to a card from the same bank?"

Usually balance transfers are offered between different banks.

"What if I can't repay within the offer period?"

The remaining balance attracts the regular interest rate.

Key points to remember

• Balance transfers reduce interest temporarily, at a fee.
• They work only with a repayment plan and no new spending.
• Compare total costs with alternatives.
• The promotional rate ends after a set period.
• It's a tool for discipline, not an escape from it.

Summary

A balance transfer can save money for a disciplined borrower with a plan. For others, it can make debt worse. Explain it honestly and suggest reputable financial help when needed. Read what happens if you miss a payment.

A quick checklist before a transfer

1. 1Total fee for the transfer, including GST.
2. 2Length of the promotional period.
3. 3Monthly amount needed to clear the balance within that period.
4. 4Whether the old card will be kept unused or closed.

If the monthly amount isn't realistic, a balance transfer may not be the right choice.