Balance Transfer - What’s the catch?

With the recent inquiries into the banks and in particular their rates the question whether people benefit from balance transfers on credit cards was raised. When questioned about balance transfers Matthew Comyn (Group Executive of Retail Banking Services at CBA) stated that the experience with 0% balance transfers both in Australia and around the world is that “customers increase their debt and many do not pay off the debt before the end of the offer period… it could be characterised as a debt trap”.

The Banks returns on equity for credit cards can be as high as 40.25% (as reported in the consumer action law centre “Credit-Card-Interest-Rates-Submission”) and so these are very profitable, if a balance is not paid off in the interest free term as was acknowledged many don’t, the banks now hold a very lucrative asset. That is the trap to be aware of, if you apply for another card to transfer your balance without decreasing your credit limit on your existing card you have the possibility to increase your total debt.

Another trap to be aware of is that the interest free rate usually only relates to the transferred balance and if you use the card (as many do) then you will pay interest on that spending until the entire balance (not just that spending) has been repaid.

When evaluating the different debt consolidation and interest rate reduction strategies that are available to you it is important to first look at how the debt was accumulated. If it was a one off unexpected and unavoidable expense that you have had difficulty in recovering from then things like this may be beneficial to you. If the credit card balance you are considering transferring has just accumulated over time then you are more likely to fall into the trap of increasing your total debt and it would be far more important to look at your budget and cash flow management strategies before debt consolidation.

If this has raised any questions of your own feel free to give me a call and I’d be happy to arrange a review of your finances including your budget and debt position.

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