2.         Below are two further extracts from Balance Transfer Interest Free Period Offers:

            The Guardian article "Interest-free credit card trap snaring unwitting borrowers" - 25 March 2012 notes, 'inter alia' that:

"Brian Cole, of Capital One in the UK, the bank that first introduced zero-interest balance transfers to Britain in the 90s, says: "There's a lot of practice in the [banking] marketplace that is shameful, and credit card companies are not immune. [Balance transfer] customers think they're going to progress in getting out of debt, and get some relief from interest payments. But make a mistake and you will end up making money for your credit card company."

            Commonwealth Bank has maintained for many years that Balance Transfer Offers should be banned:

"CBA's head of retail banking services, Matt Comyn, claimed it had never offered zero rates on balance transfers because it could become a "debt trap" for customers.

            "We view that such arrangements are not the right thing to offer our customers," he said"

 

Commonwealth Bank said zero per cent balance transfers should be banned and mandatory minimum repayments of interest and principal should be imposed for card holders of up to 2.5 per cent.

NAB question CBA's motives

However, NAB – which has the smallest credit card market share of the major banks at 10.5 per cent – told the same hearing 0 per cent balance transfers helped competition and questioned the motives of CBA as the dominant credit card issuer with about a quarter of the market.

Mr Comyn denied the bank's enthusiasm for banning zero per cent balance transfers was more about reducing the ability of competitors to take its customers. He said CBA competed on other features, including technological innovation such as giving customers the ability to block overseas transactions."

Balance transfer credit cards

Credit card companies just love to advertise low or no interest rates for debts transferred from other cards, purportedly to help you get out of debt. But it's really a ruse to bring new customers on board and get them paying interest down the road.

The interest rate applying to the balance transfer generally ranges from 0% to 5%, for a period of four months up to as long as it takes you to repay the debt. It can seem like an offer too good to refuse.

One big thing to bear in mind, though, is that the low-interest or no-interest offer generally applies to the amount you transfer over from another card only – not to any new purchases with your new card – and you will likely be charged a fee based on the amount you're transferring, one that can go as high as 3% (meaning you would pay $30 to transfer over $1000 and $300 to transfer over $10,000).

The longer the interest-free period, the higher the balance transfer fee. 

Switching to a no-interest or low-interest balance transfer credit card can be a good way to get a handle on your debt or to avoid making repayments for a certain period of time.  But for the unsuspecting or undisciplined, balance transfer cards can go terribly wrong.

And bear in mind that flipping your debt to a low-interest or no-interest promo deal too often can affect your credit rating, as can having multiple credit card applications rejected.

The top five balance transfer credit card traps:

1. The 'payment hierarchy' con

When you make repayments, they're firstly applied to the balance transfer amount – even if the card has a 0% interest rate, and even if other purchases and cash advances are accumulating interest at higher rates. In other words, the credit card people have rigged it so you'll end up paying as much interest as possible.

As one credit card provider puts it: "Payments made to your credit card account are first applied to any amounts transferred from other credit cards, charge cards or store cards under this promotion, before they are applied to any other purchase or cash advance amount. This means that the portion of your outstanding account balance that is subject to a lower interest rate will be paid off first."

Katherine Lane, Principal Solicitor with the Consumer Credit Legal Centre in NSW, told us this payment hierarchy technique "is a trick most often used in interest-free deals to trigger interest being charged. It is completely unfair."

2. High interest on new transactions

After you transfer your debt to a low-interest card, any new transactions you make usually attract interest immediately at the standard rate, which is invariably much higher than the low introductory rate. You may have no interest-free period with such transactions.

As one 2.9% balance transfer card disclaimer puts it: "Any transactions made other than with this offer are at the standard Credit Card rate, currently 20.39% pa."

Another disclaimer says: "You will not gain the benefit of the interest free period on credit purchases until the full balance (including any balance transfer and any other promotional amount) is paid by the statement due date each month."

3. Luring you into a bad deal

The balance transfer might simply be the hook that lures you into a card that's otherwise poor value in terms of fees and standard interest rates. Many have standard annual interest rates close to 20% or even higher that will kick in after the introductory, or teaser, rate comes to a close.

4. Percentage fees

A fee may apply to transfer the balance. The fine print of one balance transfer card puts it nicely: "A 1% Balance Transfer Handling Fee to a maximum of $50 applies to each balance transferred." If you're transferring a lot of debt, that can really add up. And 3% fees are not uncommon, especially with longer interest-free offers. 

5. Double trouble

You might be tempted to keep spending on the old credit card, increasing your debt problems and creating even bigger debt repayments. We recommend cutting up the old card.