What are balance transfers, and how do they work?

This article is part of a fictional case study series following "Sarah", a typical first home buyer in Victoria. Read each article to follow "Sarah" through a variety of articles exploring issues related to buying a home.

Looking at a few of her debts, Sarah started thinking about how she could get some traction on that pesky credit card. All of a sudden, a TV ad came on - for a balance transfer. 

These are pretty common financial procedures, but if you’ve never had need for one then you may not know how they work. It’s actually pretty simple.

A balance transfer is when you take the debt you owe one bank or lender, like a credit card, and then transfer the debt to another. Now, why would you want to do that? Well, many credit card providers will provide an interest free period – sometimes up to a year – if you transfer your balance over.

Now, can a balance transfer be useful?

Sure. After looking around, Sarah found a bank that was able to provide her a balance transfer of 0% for six months.

Now, why would she want to do that?

• It can help her save on interest. That’s hundreds of dollars she can save by paying off that debt within six months.
• Transferring the balance can mean Sarah gets started saving for her deposit much sooner than she would have otherwise.

Now, remember, a balance transfer isn’t the be-all and end-all of financial moves. It isn’t a secret to wealth, nor is it a silver bullet. Here are some things you should avoid after getting a balance transfer:

• Keeping your old card. Instead, close off the old card to make sure you don’t increase your level of debt and credit limits
• Falling back into old habits. Don’t keep using debt after you’ve managed to get a 0% interest free period!
• Thinking that you can relax on your debt payments or savings. Keep up the momentum and get all that debt gone, so you can keep saving!

An interest-free balance transfer is like a “pause” button. It isn’t a “stop”. So attack it quickly, and get your savings going towards that house.

SARAH'S TAKEAWAY:

Doing a balance transfer can help Sarah pay down debt faster, but she still needs to keep paying it off aggressively. The sooner she does that, the sooner she can get my first house.