Even with a 0% p.a. interest rate on your balance transfer debt, making new purchases could affect your repayments. Here’s what you need to know to stay on track.
While you can use a balance transfer credit card for purchases, you’ll probably be charged interest on any new transactions. This is because the promotional 0% interest rate applies to the debt you’ve transferred to the card and not to new purchases.
What’s more, your repayments will go towards your purchase debt before your balance transfer debt, because credit card payments are allocated to the balance with the highest interest rate first. In the worst-case scenario, you could end up with a balance transfer debt at the end of the 0% p.a. period (when a much higher interest rate applies) – plus a purchase debt that also collects interest.
To avoid this scenario, it’s important to understand how repayments work when you have a balance transfer debt and purchase debt on the same card so that you can manage your repayments in a way that works for you.
How are repayments allocated on a 0% balance transfer credit card?
Credit card repayments are allocated based on the portion of your balance that attracts the highest interest rate. This is the case for Australian credit cards opened on or before 1 July 2012.
So if you have a card with a promotional 0% p.a. interest rate on your balance transfer debt, your repayments will go towards any part of your account balance that is being charged interest first. Then, if there is any money remaining from your repayment, it will go towards your balance transfer debt.
Example of how a new purchase could affect your balance transfer
Say you’ve transferred a debt of $3,000 onto a new credit card that offers 0% p.a. for 12 months on balance transfers and has no annual fee. At the end of this period, the interest rate reverts to a standard variable purchase rate of 19.99% p.a. Let’s also assume you’ve planned to pay $250 per month off the card, which is just enough to clear the debt within 12 months if there are no other charges.
Based on these details, if you made a purchase of $1,500 on this card, you would have to make 7 monthly payments to clear this debt and it will cost you $93.98 in interest. That leaves you with about 5 months of your 0% p.a. balance transfer rate.
So, if you continued to pay only $250 per month off your card, you’d have a balance transfer debt of $1,750 at the end of the introductory period. Assuming you continued with your $250 monthly repayments after that, it would take you another 8 months to pay off your debt and cost you around $124.63 in interest.
Tips to manage a purchase debt on your balance transfer card
If you need to use your balance transfer card for new purchases, here are a few options for managing the debt and avoiding the pitfalls of the scenario above:
- Pay off the purchase as quickly as possible. Aim to make higher repayments so that you can clear your purchase balance more quickly. Once that’s paid off, your repayments will go towards your balance transfer debt and you can make the most of the 0% interest period.
- Consider a card that offers 0% on balance transfers and purchases. If you’re looking at balance transfer cards and know you also need to make new purchases, you could look for a card that offers introductory 0% interest rates for both balance transfers and purchases. Just keep in mind that the introductory periods could be different for existing debts and new debts on the card.
- Get a credit card with a long balance transfer period. If you know you’ll need to use your card for purchases at some point, look at cards that offer a long balance transfer period, such as 0% p.a. for 24 months.
- Look for a card with a low purchase rate. Getting a balance transfer credit card with a low standard variable interest rate for purchases can help keep your interest charges down so you can pay off that debt faster, then get back to dealing with the balance transfer debt.
Compare credit cards that offer 0% on balance transfers and 0% on purchases
Using a different credit card for purchases
You could also decide to make your purchases on a completely different card. This will keep your balance transfer debt and purchase debt completely separate, meaning you’ll be able to make the most of the 0% p.a. interest rate on your balance transfer.
But with this option, you will need to make separate repayments for both your credit cards. You’ll also still be charged interest on your purchases – unless you happen to be eligible for interest-free days on the card you use for purchases (i.e. if you’ve paid the balance in full for at least two statement periods).
In an ideal scenario, you wouldn’t make new purchases when you’re paying down debt on a balance transfer credit card. But if there is a situation where you need to use your card, understanding how repayments work and using some of the tips above will help you reduce the risk of more interest charges by planning your repayments.
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