What the new credit limit rules mean for balance transfers
If you apply for a balance transfer in the new year, your credit limit will be based on what you can afford to repay over three years.
Some of the most competitive 0% p.a. balance transfer offers available at this time of year offer 0% p.a. interest for an introductory period when you transfer your existing debt.
A Finder analysis of Reserve Bank of Australia data predicts we'll spend over $28 billion on cards this December. This is more than in previous years and suggests a lot of us will be dealing with big balances in the new year.
But if you do have a lot of debt, changes to the way credit card applications are assessed could make it harder to get a balance transfer for the full amount you owe.
This is because, from 1 January 2019, credit card providers will determine your credit limit based on your ability to pay off the full amount over a three-year period. The calculations also have to assume that interest is being charged at the highest rate on the card.
But the real kicker for balance transfers is that this assessment will also factor in your existing cards, with providers required to assume that you're making repayments at a rate that would allow you to pay off each credit limit within a three-year period.
If you have a credit card with a high limit or a few different cards, these calculations could seriously impact on the credit limit you're offered on a new balance transfer card.
In some cases, it could mean you are only able to transfer some of your debt onto the new card – particularly if the card only allows you to balance transfer a percentage of your credit limit.
Example: How this could affect balance transfers
Say you've got $5,000 owing on your existing credit card and you apply for a 0% p.a. balance transfer card that allows you to transfer up to 80% of your approved credit limit. That means you'd need a credit limit of at least $6,250 to transfer your entire debt over.
In this scenario, if this card had a standard rate of 21.99% p.a., the credit card provider would need to be able to see that you could afford to pay at least $238.66 off the card each month in order to offer you a high enough credit limit. This is based on results from the credit card repayment calculator, which shows it would take just under three years (36 months) to pay off the $6,250 credit limit in this scenario.
This also assumes the provider would offer you the maximum limit in this situation and that you don't have any other cards.
As the provider does these calculations when you apply, you won't know your credit limit until your application is approved. But there are a few things you can do to help increase your chances of a successful balance transfer, including the following:
- Estimating how much you could comfortably afford to put towards a credit card each month.
- Requesting a specific credit limit that would allow you to transfer the full amount of your existing debt.
- Reducing the limits on any existing cards.
- Cancelling any cards you're not currently using (if they have a $0 balance).
If you're worried your balance transfer won't be approved, or that the credit limit you're offered will be too low to transfer all of your existing debt, another option is to pay off some of the debt before you apply for a balance transfer offer.
You can also get a free copy of your credit report and credit score before you apply. This will show you exactly what account details are currently listed and give you an idea of your creditworthiness so that you can find a balance transfer card that fits in with your circumstances.
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