“0% p.a. on balance transfers…”
These deals effectively offer an interest free loan. Free money? Maybe, but not if you end up paying fees.
Of course, if you can find a 0% balance transfer offer for a card with zero annual fees then it really is an interest free loan. One card that’s proving popular at the moment, perhaps for that very reason, is the American Express Essential Credit Card, which has zero annual fees, 0% on balance transfers for 12 months, and a relatively low interest rate of 14.99%. It also includes free Smartphone screen insurance (and we all know how easy it is to crack a screen) and it supports Apple Pay.
But what if you’re looking at a card with annual fees? How do you work out if the 0% interest rate justifies the fees? The simplest approach is to treat those fees as interest.
Take, for example a credit card with card fees of $199 per year – we’ll round that up to $200 to make the maths easier. The effective interest rate will depend on how much you borrowed.
Initially that’s the amount of the balance transfer, but as you pay the balance down, the effective interest rate goes up.
So if you transfer $5,000 then a fee of $200 each year is the same as a 4% interest rate. (That’s 200/5,000 which is the same as 2/50, that is 4/100 or 4%.)
For other amounts:
| Your Balance | Annual Fee | Effective Rate |
| $10,000 | $200 | 200/10,000 = 2% p.a. |
| $5,000 | $200 | 200/5,000 = 4% p.a. |
| $2,500 | $200 | 200/2,500 = 8% p.a. |
| $1,500 | $200 | 200/1,500 = 13% p.a. |
| $1,000 | $200 | 200/1,000 = 20% p.a. |
So if your debt is over $5,000 it’s an attractive offer, even with the annual fees. But once the balance drops below around $2,500, you may be able to find cheaper finance, elsewhere.
Of course, if you decide to take advantage of this type of offer, make sure you don’t incur fees. Make it work by being disciplined…
- Make at least the minimum payment before its due date. Be regular as clockwork (diarize it or set up a recurring payment via online banking). If you don’t, late payment fees will destroy the benefit very quickly. If you incur a late payment fee of $30 every month, you’ll spend $180 per year: almost as much as if you chose a high annual fee card.
- Avoid making purchases on this card (until you’ve paid down the balance), or repay them immediately, as you will have no interest free period. Remember that the ‘up to 55 day interest free’ period for new purchases only applies when the balance is paid off in full by the due date. So if you are taking advantage of a balance transfer interest holiday, any new purchases will incur interest from day one.
- Repay the balance in full within the introductory interest free period. Beyond that you will be charged at the cash advance rate.
- Be careful you don’t become a ‘serial balance transferrer’. Don’t overdo it. If you apply for a new card time and time again, the repeated credit applications will show up on your credit report, which may make it harder to get credit down the track when you really want it.
What are your thoughts?
Do you think it makes sense to switch your credit card balance to a 0% offer card? Are your credit cards in control? Is there anything else you’d like to know about managing credit card debt?
Join the conversation — leave a comment below and let us know what you’re thoughts are.