How a Balance Transfer Could Help You Get Out of Debt

Are you funding your lifestyle with credit card debt at an interest rate of 18.5%? Do you feel you are drowning in debt and will never get rid of it? Millions of Australians have permanent credit card debt. Don’t be one of them. Consider how a balance of debt transfer can help you.

Advantages of Transfer

Transferring debt from a high-interest credit card to a low-interest credit card is a useful method to give you temporary relief from high card repayments.  If you do decide to go down this path and you succeed in transferring 70% or perhaps more of your current debt, make a plan on how to pay this debt off. Remember, transferring the debt does not mean that the debt is extinguished. After the honeymoon period, the interest rate of the new credit card will be just as high as on the original card, if not higher. So, make a real effort to pay off the debt while it is at the low or no interest rate. There are several options for transferring the debt to another credit card. Some receiving financial institutions charge no interest or a low-interest rate for the first 6 or 12 months.  There are quite a few options. 

The below website explains the mechanics of balance transfers and is a good summary of what is involved.

Balance Transfers: key rule explained

“We get a lot of questions and comments about balance transfers here at creditcard.com.au, so we’ve addressed the most common ones below and also discussed them in a video.”

  • How long does a balance transfer take?
  • Watch the balance transfer video
  • Which banks can I balance transfer to?.Whats the minimum amount I can transfer?
  • What rate does the balance transfer revert to?

Consolidating Your Debt

Instead of transferring your current credit card debt to another credit card, you may be eligible to transfer all your debt to a loan with your bank. This will have the advantage of being able to restructure your debt and get the benefit of the relatively low-interest rates charged by banks on personal loans. So, instead of paying off 3-4 different credit cards at a rate of 19% per annum, you may be able to make only one payment per month or week (your choice) at a rate of 7-8% per annum. This will give you a much better oversight of your debt position and allow you to include the weekly or monthly payment in your budget.

“In Australia, debt consolidation loans are very common and assist Australians who are struggling to manage numerous small debts. Rather than continue to juggle a number of debts, a debt consolidation loan allows Aussies to “consolidate” (i.e. join them all together) and have just one loan.”

Will You Qualify for Debt Consolidation?

It is all very well to say “Consolidate your debts!” But will you qualify? This will depend on a number of things including the amount of debt you have and whether you can offer any security. If you own your home and have a mortgage, it will generally be easier  than if you own no real estate. Some finance institutions will also lend against an insurance policy or a retirement fund. Your bank may well be prepared to add the credit card debt to your current home loan. If you don’t own any real estate, but own a car, your bank or finance company may be prepared to lend you money on the security of your car. If you don’t own any assets which can be used as security, you may find it difficult to obtain a personal loan from a bank.

“While unsecured personal debt consolidation loans used to be quite common, they are less likely to be available to people who need them today. Generally, an unsecured loan will require the borrower to have very good credit. Accepting a no interest, or low interest, introductory rate on a credit card is often used as a substitute for an unsecured personal loan for debt consolidation.”

The Cons of Debt Consolidation

If you have succeeded in getting a  bank loan to consolidate your credit card debts on the security of your home, car, retirement fund or other assets, you risk losing these assets if you default on the repayments. It is therefore very important for you to keep up the payments.  While this may be a good thing, it also increases the pressure. But just because the pressure of paying off the credit card is now off, don’t fall into the trap of going on a spending spree. Use any additional money you may now have, to repay the debt as quickly as possible.

Get Professional Advice

Debt consolidation is a tricky area to navigate since so many options are available. Don’t rush into the first option you hear about without getting proper financial advice.

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