January 17, 2007
Balance Transfers may not result in a happy ending
Reduction of a Christmas credit card debt may be a new years resolution for many
Australian households. However when considering the options available, Members
Equity Bank (ME) is warning consumers to be cautious when considering special
offers such as low rate balance transfers, because these offers don’t always result in
faster debt reduction.
Tony Beck, Executive Manager of Workplace Business and Direct Marketing said
consumers need to understand the components of their credit card debt before
transferring the balance to a new provider.
“In a cluttered finance market, honeymoon rates and other gimmicks to attract new
business are common practice. Balance transfers offering a low rate of interest are a
particular concern for people hoping to reduce their debt sooner,” he said.
Garfield Wright from CANNEX says there are over 50 cards on the market offering
balance transfer offers under 4%, however some of these have a balance transfer
revert rate that is higher than the card rate for purchases.
“It’s important that the cardholder taking up the balance transfer offer sees it as an
opportunity to pay off their debt rather than as a free parking space for their debt.
“Recent research from the UK has found that people who try and jump from one
balance transfer offer to the next are simply carrying their debt around rather than
paying it off,” he said.
Tony Beck added that many banks charge different interest rates for different
components of an outstanding account, and consumers need to understand the rates
applicable to each part of the balance and the way that payments are applied to the
“For example, a customer usually incurs a higher rate of interest for purchases and
cash advances but any payments being made are applied to the lowest rate
component. This means that over time, the balance transfer amount on the low rate
of interest is repaid leaving the higher interest components outstanding and
attracting a high rate of interest.