Discover how you can get out of debt sooner by switching to a credit card with a lower interest rate.
If you have credit card debt, paying high interest can make it difficult to get out of the red. A balance transfer to a card with a lower interest rate could help you save money on interest charges and pay your credit card debt off sooner rather than later.
There is a wide range of balance transfer deals out there, many with a 0% promotional interest rate period. This guide explains how balance transfers work, examines the different cards that offer ongoing low interest rates and discusses the other factors to consider before applying for a new card. If you decide this option is right for you, we also outline the steps you need to take to switch to a low interest credit card.
Choose your type of low interest credit card
How do balance transfers work?
A balance transfer is designed to save you money on your credit card interest repayments by allowing you to move your existing debt to a new card with a low promotional interest rate. Say you have a $5,000 credit card debt accruing interest at 20% p.a. If you apply for a credit card offering a 0% interest rate on balance transfers for 6 months, you could save up to $487 in interest repayments during the introductory period.
At the end of the introductory period, the promotional interest rate will revert to the purchase or cash advance rate, depending on the credit card. Depending on your circumstances, you could then do a second balance transfer to get another introductory rate on your credit card debt. If you decide to take this path, keep in mind that applying for these offers regularly could have a negative impact on your credit rating and may lead to declined applications.
Comparison of Balance Transfer Credit Cards
What about cards with low ongoing interest rates?
Low interest rate credit cards offer competitive standard variable purchase rates that are lower than many other cards. Unlike low promotional rates, this type of card gives you ongoing low interest rates that could be beneficial if you regularly carry a balance.
Low rate credit cards can also feature promotional purchase rate offers and balance transfer offers. So if you have a card debt that will take longer than 12 months to pay off, you may want to consider transferring it to a card that offers a promotional balance transfer rate and a low ongoing interest rate. This could help you save money on interest charges when paying down debt over several years.
Comparison of Low Interest Rate Credit Cards
If you decide to transfer your balance to a card with a low standard variable purchase rate, be sure to check the revert rate at the end of the balance transfer promotional period. The balance transfer rate will revert to either the purchase or the cash advance rate, and the cash advance rate of a low rate credit card can be as high as 22% p.a., which is not ideal if you still have debt to pay off.
Other factors to consider
Before switching to a low interest credit card, make sure you consider the following factors:
- Standard interest rates. These are the ongoing rates of interest that apply after the introductory promotional period has finished. Be sure to check both the purchase rate and the cash advance rate, as well as which rate will apply to any remaining balance on the card.
- Annual fees. Annual fees for cards with low ongoing interest rates can range from $0 to $99, but can also be over $400 for some premium cards with balance transfer offers. This is an ongoing cost you will have to pay for most cards, so remember to compare a range of options to find the features you want for an annual fee you’re willing to pay.
- Balance transfer fees. Some credit card companies charge a one-off balance transfer fee, usually worth around 1-2% of the balance transfer amount. For example, if you transferred a debt of $5,000 to a card that charged a 1% balance transfer fee, this fee would cost you $50. Make sure you read the balance transfer requirements and factor this cost into your comparison so you can choose a card that’s affordable for you.
- Maximum transfer amount. Credit card companies put a cap on the maximum amount you can balance transfer. The maximum balance transfer amount ranges from 75-100% of your approved credit limit and is subject to application and lending criteria for individual cards.
- Interest-free periods for purchases. You’re ineligible for interest-free days on purchases if you’re carrying a balance on your card. This means any new purchases you charge to the account will accrue interest right away.
- Complimentary extras. Many low rate credit cards also offer value-adding features such as complimentary travel insurance, purchase protection insurance or even rewards. These features usually attract a higher annual fee, so they are only really worth it if you regularly make use of them.
- Late payment fees. If you don’t pay off at least the minimum of your balance every month, you could be charged a fee of around $10-$30. Late payments will also result in a listing on your credit file, which could negatively affect your credit score.
Steps you can take to switch into a low interest credit card
Once you’ve compared cards and found one you’d like to switch to, follow these steps to complete the process:
1. Find out your current balance. Work out how much credit card debt you need to transfer to pay off your credit card(s).
2. Check the application requirements. Assess whether you’re eligible for the balance transfer credit card. Some cards require a minimum income amount and also list balance transfer limits, which will be important when you’re preparing to make the switch.
3. Apply for the card. Provide as many details as possible in all sections of the application, including your personal information, employment information and assets and liabilities. In order to receive the balance transfer offer, you usually have to request it when you apply. There will be a section on the form that prompts you to enter the details of your existing debt, including the account name and number, provider details and the amount of debt you wish to transfer to the new card.
4. Activate the card. Balance transfers can’t be fully processed until the new credit card is activated, so once you’re approved and have received your new card, follow the steps provided for activation. Also remember to continue making any payments on your existing card if they are due before the balance is transferred.
5. Wait for the balance transfer to be finalised. Your new bank must contact and buy your credit card debt from your old bank. This process usually takes around 10 business days but could be more or less depending on the issuer and your circumstances.
6. Close your old account and start paying off the new one. It’s your responsibility to close your old credit card account after you’ve completed a balance transfer. This will help you to save on credit card fees and reduce the temptation to spend more on credit.
When you want to switch to a low interest rate credit card, it’s important to have an understanding of how long that rate applies for. Some cards offer promotional low interest rates, others offer ongoing low purchase rates and there are some that provides both promotional and ongoing low rates. But whatever you’re looking for, remember to consider the card’s annual fee so that you can find the right standard features and promotional offers for an acceptable price. If you need help comparing credit cards, ask us a question using the form below and a member of our team will be in touch.
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