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Most of the time when you pull out a credit card, it's just to make a payment. But what if you could get other benefits too?
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When you apply for a balance transfer credit card, both the credit limit and the amount of debt you want to move are subject to approval. In some cases, you could be approved for a balance transfer credit card with a credit limit that is less than the debt you wanted to transfer onto it. While you could still get a balance transfer onto the new card, you’d also have a balance on your old card.
There are three main options you can consider if your balance transfer debt is more than the credit limit you're approved for on a new card:
So before you apply for a balance transfer credit card, it’s a good idea to think about what factors could lead to only part of your balance transfer being approved – as well as what to do if that happens.
Here are some of the major elements that could influence your balance transfer outcome.
Your credit history and credit score are assessed for both the credit card and the balance transfer. In some cases, your credit history could be acceptable for the card but not for a credit limit that would be high enough to support your balance transfer debt – particularly if you have a poor or bad credit score.
In Australia, a bad credit score is any number between 0 and 509. This score would usually indicate recent issues with managing debt. For example, you may have applied for a lot of credit in a short period of time, defaulted on an account or filed for bankruptcy.
As a general guide, you’re more likely to have success with credit applications if your credit score is within the Good, Very Good or Excellent brackets, which range from 622 to 1,200. These scores indicate you’re able to manage credit responsibly by making payments on time and avoiding issues such as default accounts or frequent applications.
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Credit card providers use details of your income and employment to help determine your credit and balance transfer limit. Earning a low income, only working casually or part-time and even changing jobs could all have a negative impact on your balance transfer credit card application.
However, it is less about the absolute numbers and more about how your income compares to your expenses. When you apply for a credit card, you will have to provide details of all of your sources of income as well as your expenses (rent or mortgage payments, childcare, groceries, etc). If you’re spending the majority of what you earn (or more), it will be looked upon less favourably than if you were saving every month.
If you have been approved for a balance transfer credit card with a limit that’s lower than the debt you want to transfer, you can call the bank or credit card company and ask them for more information about this decision. While they may not be able to give you the full details, it could help you decide what to do next.
As well as your income, the amount of debt you already have can affect the credit limit you get on a new credit card. So even if you apply for a balance transfer because you want to pay down your debt, it could be difficult to get approved for the whole amount if what you owe is high with respect to your income.
But there is a silver lining: if you have existing debt, your creditworthiness can improve when you are making payments towards it. This is because your repayment habits indicate that you will repay what you owe.
Let’s say you owe $5,000 on a credit card with an interest rate of 19.99% p.a. and can afford to pay $400 off it per month. If you stuck with this card as it is, it would take 15 months to pay off the debt and cost you $653.35 in interest.
Now, say you’re approved for a balance transfer credit card offering 0% p.a. for 18 months but can only transfer $3,000. If you went ahead with the transfer, you could split up your $400 payment between the cards to help save on interest.
For instance, if you paid $300 per month off the card with the $2,000 debt and interest rate of 19.99% p.a., it would take around 8 months to clear the debt and cost you $137.91 in interest. During this time, you’d also be paying $100 per month off your new balance transfer card’s debt. So after 8 months, the balance on that card would be $2,200 and you’d still have 10 months of the 0% interest rate.
If you then continued to pay $400 per month on the debt, it would take you 6 more monthly repayments to clear the debt. So in this scenario, you’d enjoy a 0% p.a. interest rate on your $3,000 balance transfer for the whole time before you paid it off.
Even if you aren’t approved for the full $5,000 balance transfer, transferring the $3,000 you’re eligible to transfer to a new 0% p.a. card saves you $515.44 in interest and you’d be out of debt one month sooner.
Keep these factors in mind when you’re comparing credit cards or applying for a balance transfer, so you can find an option that suits your needs.
If you’re looking for a balance transfer but your new credit limit will not cover your entire debt, you could also look at getting a personal loan to cover the debt left over on your original credit card. This could help you save on interest as you pay off the balance, as personal loans typically offer lower standard interest rates than most credit cards.
A personal loan could also be an option if you’re not approved for a balance transfer, or if the introductory 0% p.a. interest period has ended and you’re faced with paying a higher, reverted rate on your new card.
* The credit card offers compared on this page are chosen from a range of credit cards finder.com.au has access to track details from and is not representative of all the products available in the market. Products are displayed in no particular order or ranking. The use of terms 'Best' and 'Top' are not product ratings and are subject to our disclaimer. You should consider seeking independent financial advice and consider your own personal financial circumstances when comparing cards.
