Credit Card Mastery - Interest Free Periods

Given the influence they can have on our lives and financial independence, we’ve asked financial literacy guru Peter Mordaunt, to talk through some of the fundamentals around the use of credit cards.

Following on from last month’s when he wrote about the dangers of only paying minimum monthly repayments, this month Peter look at the balance transfer offers “0% interest for 12 months” with which we are constantly barraged.

Have you ever received an offer from a credit card provider that offers to take over your existing credit card debt, and for a honeymoon period (usually 6-12 months), you don’t have to pay any interest on the amount you transfer over to them? Attractive as the offer of ‘no interest’ sounds, there are a few facts you need to be aware of.

First, if this deal looks attractive, it’s likely that you’re not paying your full credit card debt when it’s due therefore attracting and accumulating monthly interest charges onto your existing debt. However, whilst this offer looks good, for it to work in your favour, you must commit to paying off the full debt that you transfer over during the interest-free period.

Also, interest will still be attached to any new purchases – to avoid paying any interest then you must pay off the new purchases as well as the minimum payment each month.

If you do not pay off new purchases when the card is due:

  • You will incur interest on the new purchase amounts
  • You will find that once the honeymoon period has expired, you’ll also have an increase in your credit card debt, possibly a higher rate than your previous arrangement.

Also,

  • On some credit cards the balance of the transfer amount that has not been paid off may attract interest at the cash loan rate, which can be as high as 24% per annum.

Quick Question: Does it seem overly generous of the banks to offer a ‘no interest rate loan’? A cynical person might conclude they expect a high proportion of those who take up the offer will not have paid down the transferred balance within the specified period and as a result, will be paying an interest rate of up to 24% per annum.

Some Important Facts:

  • As a vehicle to improve your debt position, credit card balance transfers to a fixed period interest-free offer only work if you intend to pay off the entire balance within the honeymoon period.
  • The new credit provider may give you an increased limit to encourage you to use the card – don’t be tempted, keep your credit card limit as low as your transferred amount.
  • It is possible that a higher rate will apply to the unpaid initial amount you transferred than what was available on your previous card.
  • If you are not disciplined and pay off your new purchases as well as minimum payments, you will find yourself at the end of the honeymoon period with a higher level of debt than what you started with.

If you are considering one of these offers, please ensure you plan how you will repay the transfer balance before you transfer your credit card balance over.

My golden rule

ONLY TRANSFER TO AN INTEREST-FREE FOR FIXED PERIOD CREDIT CARD IF YOU INTEND TO PAY OUT THE BALANCE OVER THE HONEYMOON PERIOD.

Previous Posts from Peter:

____________________________________________________________________________________

Peter Mordaunt spent much of his career in senior investment management with local and international banks. However, when he became aware of the rising level of personal and credit card debt within Australia, he turned his experience to financial literacy education. Along with running his private consultancy, Peter lectures at Macquarie University, volunteers to clients of NFP's and mentors students of all ages in money management. His philosophy on eliminating credit card debt is that every dollar you pay off the credit card is dollar you have saved.