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Zero-interest balance transfers credit cards can have sting -  North West Star  -  John Collett -

As many Australians struggle with credit card debt after a Christmas and holiday splurge, zero-interest balance transfer offers may seem like the answer.

Lenders promote these deals at this time of year and there are more than 100 on the market right now, according to Kirsty Lamont, a director of comparison site Mozo.

"Lenders dangle these balance transfer offers as carrots to try and entice consumers to sign-up to cards that, in many cases, can be very expensive," Lamont says.

They can work for those who have the discipline to pay off the balance in full before the interest-free period ends. But those who continually struggle to pay off their credit card debts may be better off with a "vanilla" low-interest rate card or even a personal loan with a fixed repayment schedule.

Dennis Reddy, a 28-year-old accountant from Sydney, is making a balance transfer deal work for him.

Reddy was paying about $150 a month in interest on his credit card debt and finding it difficult to clear the debt.

At the end of last year he decided to make a fresh start and get the debt under control. So he checked online for a good zero-interest balance transfer card.

"I didn't care who the provider of the card was as long as the deal was competitive," Reddy says.

He then transferred his balance to a credit card from another bank with an interest-free period of 18 months.

The card had a balance transfer fee of 2 per cent, but the $99 annual fee was waived for the first year.

"I thought about hanging onto the my old card after transferring the balance to the new card, but thought that would lead to more debt so I cancelled that card," Reddy says.

Even though his new card has an annual interest rate of more than 20 per cent after the interest-free period, his plan is to extinguish the transferred debt completely before that kicks in. He intends to keep his transfer balance card, but only for use in emergencies.

To make purchases, he has retained his debit card that is attached to the savings account with his original bank into which his pay goes.

"The lesson learned is that if you don't have the money you don't spend it [using credit]," Reddy says.

Caution needed

Sally Kirkright, chief executive of AccessEAP, a corporate psychology consultancy, says the start of the year is a time when many are particularly vulnerable to financial stress.

As the afterglow of the holiday period gradually fades, many face the reality of their holiday spending spree.

Australians spent nearly $10 billion on Christmas presents last year, according to extrapolation of results of a survey conducted by comparison site Finder.com.

And Roy Morgan Research, extrapolating from a survey it carried out on behalf of the Salvation Army, estimates that about two million people are leaving the festive season with worrying debts.

"Returning to work after the fun of the holiday period brings a dose of reality," Kirkright says.

"Someone who has spent more than they planned can feel out of control and stressed that they haven't managed their funds as well as they perhaps should have," she says.

And for many people the financial stress will be first felt on their credit cards.

Finder estimates Australians are returning home from holidays with $7.5 billion of debt on their credit cards.

It also estimates there will be about $180 million in interest paid on the debt that was incurred on holidays in the first year.

Lifeline

Bessie Hassan, money expert at Finder, says interest-free balance transfer cards can be a lifeline for those who've splurged over Christmas.

But it is important to be aware of the length of the interest-free period on transfers, which typically ranges from 6 to 24 months, she says.

Interest is also charged on any purchases on the card, even if the purchases are made during the interest-free period.

Mozo's Lamont says some balance transfer cards use a "revert" rate that is equal the cash withdrawal rate, which can be up to 24 per cent.

That's why it is important to work out exactly how much you need to repay every month to ensure your balance hits zero by the end of the interest-free term.

The comparison sites show balance-transfer fees are usually between 2.5 and 3 per cent of the transfer amount and annual fees range between $50 and $250.

Lamont says lenders have a range of zero-interest balance transfer cards, including those with rewards points with often higher revert interest rates and annual fees than non-rewards balance transfer cards.

Somebody who takes a balance transfer offer to pay off their credit card debt really should not be transferring that debt to an expensive rewards card, Lamont says.

"Cards with rewards points encourage cardholder to spend more when they should be using a balance transfer card to pay off existing debt and not to make new purchases," she says.

Competitive offer

Consumers need to look for a balance transfer deal that is competitive on the length of the interest-free period as well as on the interest rate and fees.

Otherwise, you risk racking-up new debt and getting nowhere, Lamont says.

"It's up to the card-holder to work out the repayments that will pay off the card within the balance transfer period and to stick to that repayment schedule," Lamont says.

"For those struggling to pay off their credit card debt the question is whether they are going to be able pay off the debt within the balance transfer period," she says.

She points out that there are "vanilla" non-rewards cards with low annual fees and with relatively low purchase interest rates of 7 or 8 per cent.

She says for those who really struggle, a personal loan with a fixed schedule of repayments could be the best option.

"Those who struggle to pay off credit card debts would do well to avoid future temptation by cutting up their credit card and using a debit card instead," Lamont says.

Kirkright says if you have debt in a couple places, such as credit cards and a personal loan, consider reviewing and consolidating these loans to get them under control.

"The credit card may be a good starting place given it may have the highest interest rate," she says.

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The story Zero-interest balance transfers credit cards can have sting first appeared  on The Sydney Morning Herald.

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