Why balance transfer credit card debt

Balance transfer credit cards in the Australian market have really become credit cards that can become very useful for people that are looking to save money on the interest that they would normally pay on a large credit card debt. For this reason, balance transfer credit cards have become the champion of the people with bad credit in Australia, giving them a chance to pull themselves out of the whole and get back on even footing with the rest of society. Balance transfer credit cards have a broad based populist appeal for this reason and are given a positive image by people that have no idea what they are to begin with just because of something good they heard from someone else.

But how do these credit cards actually work? Well, in order to see that you would need to calculate exactly how much money you can save through the use of a balance transfer credit card in the Australian market. This can be done with a poor credit card, a good credit card and a great credit card. All three of these have average values that can then be compared with the average credit card in the Australian credit card market. For the duration of this exercise, we will assume that the balance in question is $5000.00.

A Normal Credit Card

With a normal credit card, you would expect to have an interest rate of around 20% annually. If you divide this by twelve (since interest is compounded monthly), you get the monthly interest rate of 1.67%. Multiplying this rate by the balance that was stated above six times and then subtracting the initial balance from the new amount will give you the amount of interest you ended up paying on that balance over the course of the six month period. When this is done for a credit card with 20% APR compounded monthly, the result is an interest payment of $522.39.

A Low Interest Credit Card

The low interest credit cards in the Australian credit card market for the most part carry an interest of 10% annually. This means that the monthly interest figure that you use to multiply the compound interest would be 0.833%. Doing the same calculation for the low interest credit card that you did for the normal credit card would reveal an interest payment over the same six month period of $255.16 in contrast to the previous paragraph. You’ll notice that the interest payment is not half of the normal credit card payment because of the way compound interest works.

A Poor Balance Transfer Credit Card

Over a six month period of time, a poor balance transfer credit card would typically have an introductory rate of 6.0% APR just as long as you made the minimum payments on time. Assuming that happens, the monthly compound rate is 0.5% and the amount of interest you would pay over the same period of time is $151.89.

A Good Balance Transfer Credit Card

There are many rates that can be argued for a good balance transfer credit card, but the one that is seen most often is 1.9% APR for six months assuming the credit card payments are made on time. This would give a monthly compound rate of 0.158% and an overall interest payment during the six-month period of $47.58.

A Great Balance Transfer Credit Card

A great balance transfer credit card would have an introductory rate of 0% APR for six months as long as payments are made on time. This would obviously translate to $0 of interest being paid over that period of time.

Conclusion

The main bullet point to take from this discussion is that interest rates can indeed make a big difference. If you were to transfer your balance of $5000.00 from a normal credit card to a great balance transfer credit card, you would save over $500.00 in interest payments while you were mopping things up in terms of paying down the amount of money that you owe. The larger the transferred balance, the more interest you save. This is not a small amount of money either and that is really where the true strength of the balance transfer credit card is.

 

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