Watch for low-interest card trap
TRANSFERRING the debt on your credit card to a low interest card is good in theory, but there are some big dangers when you try to do it.
Think about a person with a credit card debt of $7,000. The rate is 18 per cent and he doesn’t get an interest free period because he never pays the balance in full. He simply makes the minimum payment of $140 each month, which barely covers the monthly interest.
Naturally he is intrigued when he sees advertisements offering to take over his credit card balance with an initial rate of about 2 per cent. He applies, and soon finds himself the proud owner of a credit card with a low interest rate and 55 days free credit on purchases.
He goes on a shopping spree and charges up $3,000 of clothes and electronic gear. He is due for a bonus at work and figures he will easily be able to pay the $3,000 when the credit card statement arrives.
Unfortunately the fine print is going to catch him out. Credit cards do not give you an interest free period if you do not pay out the entire balance in full, so Jack is not going to be eligible for an interest free period because of the residual debt of $7,000 that was transferred over.
As a result he will be hit with interest of 18% on the $3,000 of goods - and it will be back dated to when he bought them.
He will also be caught out by the bank’s practice of applying credit card repayments first to the lowest interest component of the debt. Therefore, the $3,000 he deposited into the account when the statement arrived will be used to reduce the transferred balance.
Instead of having an interest free period for his purchases, and continuing to enjoy at least six months of low interest, he now finds to his horror that the $7,000 low interest balance has shrunk to just $4,000. The rate on $3,000 of it is already 18%. All he needs to do is spend another $4,000 on the credit card and his interest free portion is gone.
As always, the solution to a problem like this is to tackle it head on from the start. If your money management skills are in such a dreadful state that you need to transfer your credit card balance to a low interest rate card, make sure you lock your new card up and don’t make any purchases on it.
For your day to day expenses check out www.ratecity.com.au and find a card with a permanent low interest rate so you can switch the balance on the low interest card when the honeymoon interest rate is over.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.