The average Australian credit card debt is more than $3,000, and financial advocates are worried that Australians will never pay it off.
One of the main paths out of credit card debt is a balance transfer.
In other words finding another credit card with a lower interest rate, and transferring your debt. It’s a way of breaking the cycle so the interest doesn’t keep mounting.
If you’re paying anything over 10 per cent interest on your credit card debt, you should be looking hard to make a switch, says finance Canstar expert Steve Mickenbecker.
The top six low rate credit cards in Canstar’s ranks have interest rates starting from 7.49 per cent.
“This is a good period to make a switch if you’re with the wrong card. It makes a huge difference considering the average credit card interest rates sit at 16 per cent and goes up to 25 per cent,” says Mr Mickenbecker. “It is just like chasing a tail to be honest.”
According to Moneysmart’s credit card calculator, for a credit card that charges 25 per cent interest, you’d be paying $703 interest when clearing a $6,000 credit card debt in a year.
In comparison, for a low rate credit card that charges interest rates from 7.49 per cent, you’d only be paying $207 interest. That is $496 of savings per year just by switching out to a low rate credit card, and this could be even more if you choose a card that is running balance transfer offers.
There are two other things to look out for to make sure you’re getting the best card – the balance transfer rate and annual fees.
Taking advantage of balance transfer offers is also one of the best ways to clear your existing credit card debt, according to Mr Mickenbecker.
This could be having zero per cent interest on your carried over debt for a period of 12 months.
“If you have a $6,000 debt, after making a transfer you would be paying $500 per month for a year to get rid of the debt, assuming you have no additional spend on the new card,” says Mr Mickenbecker.
“It is a good deal but only if you are very disciplined about future spending on the new card.”
He also acknowledges that there is a lot of uncertainty at the moment and consumers are worried if their application to switch will be approved.
But majority of the workforce are still holding on to their jobs even if their hours are cut.
“It is a judgement call from the lender for every individual, based on current income, how long you’ve worked in the same job…,” says Mr Mickenbecker.
If you’re rejected from the first lender, try another company or try again in about three months.
Here are Canstar’s top six low rate credit cards
|Top 6 Low Rate Credit Cards|
|Company||Card||Rate||Balance Transfer||Annual Fee||Star Rating|
|G&C Mutual Bank||Low Rate Visa Credit Card||7.49%||Regular rate as per new purchases||$50||5 Stars|
|Auswide Bank||Low Rate Visa||8.20%||Regular rate as per new purchases||$50||5 Stars|
|American Express||Low Rate Credit Card||8.99%||0% on balance transfers for the first 12 months||$0||5 Stars|
|Community First CU||Low Rate Credit Card||8.99%||Regular rate as per new purchases||$40||5 Stars|
|Easy Street Financial Services||Easy Low Rate Visa||8.99%||Regular rate as per new purchases||$40||5 Stars|
|MOVE Bank||Low Rate Credit Card||8.99%||0% for 6 months then 8.99%||$59 (waived for first year)||5 Stars|
|Source: www.canstar.com.au – 31/03/2020. Based on the lowest rate credit cards available for a balance of $10,000. Cards ordered in ascending order by rate, followed by annual fee; followed by alphabetically by company. Star Rating based on Canstar’s November 2019 Credit Card Star Ratings, in the Low Rate Profile.|
The cards are offered by brands that are less familiar customer-owned banks and credit unions. But Mr Mickenbecker says that this shouldn’t make you nervous about using them. Some of them have in fact been around for a long time and all are regulated by ASIC.
“The companies are the ones taking their risk on you not the other way around,” says Mr Mickenbecker.
For those who are convinced, Mr Mickenbecker advises that consumers should take a close look at the balance transfer offer. Besides the interest free period, it usually also states and upfront fee and the interest that will be applied after the interest free period.
This is especially important for instances where you are unable to clear your debt within the interest free period or the possibility of not being able to reapply for another card switch after the interest free period has lapsed.
“Cards are great in the right hands, it can help with smoothing your bills a bit in the short term, and when you’re confident of clearing your debt over a few months,” says Mr Mickenbecker.