Christmas might seem like a distant memory but if you’re one of the many Kiwis who gave their credit card a workout over the festive season, receiving the first credit card statement of the year could be a bit of a shock.
Reserve Bank statistics suggest that most New Zealanders run up their credit card debt before Christmas, and as a result many people start the New Year with a balance that’s costing them interest each month at an average rate of 18.95% - 20.95% per annum (p.a.).
Because of this, you may notice many banks promoting offers early in the New Year known as ‘balance transfers’ that promise low, or even 0% p.a interest on existing credit card balances.
What is a balance transfer?
A balance transfer is when a person with a credit card debt with one (or multiple) providers (like a bank, or store that offers credit) transfers that debt to another provider. Credit providers usually offer lower rates of interest for a set period of time in exchange for you transferring your debt to them.
For example, BNZ is offering 0% per annum (p.a.) to customers who transfer their credit card balance, which means that if you transfer the balance of your credit card from another bank to BNZ, you’ll pay no interest on that debt for 12 months (provided you comply with the Card terms and conditions, including by paying the minimum repayment each month).
This 0% rate only applies to the balance you transfer to the credit card, and the standard purchase interest rate will be charged on any purchases you make with the credit card.
The set period of time for the low balance transfer rate is particularly important to note. The 0% rate offer is not permanent, so if you do a balance transfer you should also put a plan in place to make the most of it. It gives you a window of opportunity to focus on paying off the balance, instead of paying off the balance plus interest.
A balance transfer can also be good if you have a number of credit cards, because you can consolidate that debt, making payments easier to manage, so you don’t miss them and incur late payment fees.
So, what’s in it for the bank?
Banks use balance transfer offers to attract new customers. If your balance transfer was worth $2000 and your new credit card had a limit of $3000, you would still theoretically have $1000 available to use for purchases. However, purchases made with that $1000 would incur interest at the usual rate for purchases (for example, if you had a card where the usual rate of interest for purchases was 19.95% and you transferred $2000 and then spent the remaining $1000, you would incur interest of 19.95% p.a. on the$1000 worth of purchases, but 0% p.a. interest on the initial $2000 balance that you transferred).
Working toward a zero balance is the best way to be good with credit cards.
Ideally, the best way to manage credit cards is paying the full balance off monthly so you never have to pay a cent in interest, but you can still reap all the benefits of having a card, like rewards, security and convenience.
A 0% p.a. balance transfer for 12 months could be a good way to get stuck into paying off your credit card balance.
BNZ terms and fees apply.