Before initiating a balance transfer to pay off an $18,000 debt, consider factors: check the introductory period, watch for transfer fees, credit score impact, ensure the new card's limit covers the debt, avoid maxing out, and review terms and penalties for a successful, cost-effective debt reduction strategy.
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“I’m slowly digging myself out of a financial hole I created a few years ago and just trying to maximize paying off my debt. I started in 2017 with around 50k – I’m currently sitting at 18k. I’m paying about $750 a month, and my interest rate is 12.99%. I’ve been looking to lower the interest rate and found I can balance transfer it to a credit card for 6%. But this seems too good to be true, literally half the interest. Is there something I’m missing here? Or should I jump on this? I am not looking for judgement – I’ve been working hard to get here. I’ve paid off all other debt, increased my pay and budgeted hard to get to this point, and I hope to be debt-free in 2 years.”
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It’s great to hear that you’ve been working hard to improve your financial situation and looking for ways to pay off your debt more efficiently. However, it would help if you considered a few things before doing a balance transfer.
Lowering your interest rate through a balance transfer can be a savvy financial move to expedite your debt repayment. However, there are vital factors to bear in mind. First, scrutinise the introductory period during which the lower interest rate applies, as it may have a finite duration, typically ranging from 6 to 18 months. To maximise the benefit, try to pay off as much of your $18k debt during this period as possible.
Pay attention to balance transfer fees, which many credit cards impose as a percentage of the transferred amount. Calculate this fee and weigh it against the interest savings. Pursuing a balance transfer may temporarily affect your credit score due to a credit inquiry and adding a new account. Nonetheless, responsible management of the new card can help rebuild your credit score.
Confirm that the credit limit on the new card accommodates your entire debt. Avoid maxing out the new card, as it can negatively impact your credit utilisation ratio. Also, maintain consistent and substantial payments to expedite debt reduction.
Lastly, carefully read and understand the terms and conditions associated with the new credit card, including any penalties or post-introductory period interest rate changes. Suppose you’ve considered these factors and have a clear repayment plan. In that case, a balance transfer can be a worthwhile strategy to lower your interest costs and achieve your debt-free goal in a shorter time frame.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The information in this post is only general in nature and is not personalised financial advice. Please contact us if you want financial advice.
